Do you know that on $10,000 at 20% you only pay
$166 per month in interest. While no one likes
to pay 20% interest on a credit card, $166 per
month isn’t going to break you. So why do
credit cards feel like such a burden? We have
already discussed that credit cards do not compound
interest, so what is it? Credit cards have a peculiar
pay back method we call the payment to balance
ratio. Instead of paying a flat payment over a
certain term, where the balance is always decreasing,
credit cards are open and the balance fluctuates.
Every month the credit card company calculates
the average daily balance and you pay a fixed
percentage of that balance as your minimum payment,
usually 2-3 percent of the balance.
One major department store card charges 21% interest
and has a payment to balance ratio of 2.1%. Because
they charge a very high rate, they do not want
their money back very fast. When you are paying
2.1% of the balance every month, and the interest
is 21%/12=1.75% per month, you can see that only
2.1%-1.75%=.35% of your balance is applied to
the principal through your payment every month. In other words, if
you paid $100 then $84 would go to interest and
$16 would go to principal. At that rate, considering
the card is still open to new charges, is it any
wonder that you never pay them off?
Low interest credit cards are not much better. |
