Money Talk Monday: How credit cards really work

By Debra Avara

 

Having a credit card is not inherently bad. It does not jump out of your pocket, run to the store and buy stuff. YOU do that, which means YOU get to choose how to use your credit card.

Credit cards work like compounding interest, which we generally think of as good, but in this case, not so much.

Take a $1000 TV you put on a credit card with a 24% interest rate. IF you only pay the minimum amount, based on interest + 1% of the balance, your minimum payment would ONLY be $30.00.

BUT it will take you 125 months to be rid of your debt. In that time, you will pay $1,332.18 in interest. BTW – 125 months = 10 1/2 years. Is your TV still going to be working?? And did you notice you were paying more in interest than you did for the TV??

YOU MUST MAKE MORE THAN THE MINIMUM PAYMENT.

IF you start off paying $30, and just don’t reduce that amount when it starts going down, it will take you 56 months to be rid of your debt. In that time, you will pay $664.42 in interest. 56 months is only 4 1/2 years. That’s quite a difference.

IF you pay $50 a month, $20 more than the minimum payment, it will take you 26 months to be rid of your debt. In that time, you will pay $289.87 in interest. That’s just over 2 years, and you’re saving $1042 in interest.

Credit card statements are now required to post how long it will take you to pay off your balance using the minimum payment. Pay attention to that area on your statement.

Credit is necessary today. If you want a good interest rate on a car loan, a house, or even to rent an apartment and get car insurance, you must have good credit. But you don’t need to abuse your cards to get good credit.

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