The Fine Print on Credit Cards- What is Interest?

The Fine Print in Credit Cards    (part one)

Interest
Interest, sometimes called the annual percentage rate, is the fee paid for borrowing money. Conversely, if you were lending the money, that fee/interest compensates you for giving up the ability to spend that money today

Credit Card Debt- Discover the Benefit of Increasing Your Payments
Let’s say John and Jane both have $2,000 debt on their credit cards, which require a minimum payment of 3%, or $10, whichever is higher. Both are strapped for cash, but Jane manages to pay an extra $10 on top of her minimum monthly payments. John pays only the minimum.

Each month John and Jane are charged a 20% annual interest on their cards’ outstanding balances. So, when John and Jane make payments, part of those payments go to paying interest and part go to the principal.

Here is the breakdown of the numbers for the first month of John’s credit card debt:

Principal: $2,000

• Interest: $33.33 ($2,000 x (1+20%/12))
• Payment: $60 (3% of remaining balance)
• Principal Repayment: $26.67
• Remaining Balance: $1,973.33 ($2,000 – $26.67)

These calculations are done every month until the credit card debt is paid off.

In the end, John pays $4,240 in total over 15 years to absolve the $2,000 in credit card debt. The interest that John pays over the 15 years totals $2,240, higher than the original credit card debt.

Does this make sense?   Please call Melanie about further information on credit cards at 416-663-2733 Ext.250