Understanding the true cost of your credit cards

It’s easy to charge it and forget it, but when you calculate interest payments, late fees and annual fees, the true cost of your credit cards can add up.

Understanding the true cost of your credit cards

Most people have at least two different credit cards, if not more, in their wallet.

When used properly, credit cards can be a great financial tool.

They can help you out in emergencies, offer great convenience, buy things you wouldn’t otherwise be able to afford right away, and provide valuable travel, merchandise and cash-back rewards.

But before you charge away, it’s important to understand how much those little pieces of plastic are actually costing you.

Interest payments

Credit card companies make most of their money on interest. And you can easily spend a good chunk of your money paying interest alone.

If you can only afford to pay the minimum payments each month and keep carrying over a balance, the bulk of your payments will go toward interest, and you will only be chipping away at paying off the purchase you charged to the card in the first place.

An example

Let’s say you want a new TV that costs $2,000. You can’t afford to pay $2,000, but you can easily charge it to your credit card and pay just $50 a month – an amount you can afford. The problem is that $50 isn’t paying down the $2,000. Most of it is just paying the interest you’re being charged.

Unless you make bigger monthly payments, it could take you years to pay off the purchase. If you keep charging, the debt will keep accumulating.

Late fees and annual fees

This is another way credit cards can cost you.

If you miss your monthly payment, you can get dinged with a late fee charge that is just money down the drain.

And many credit cards also come with a steep annual fee, which you should work into your budget.

Only charge what you can afford

The safest way to use credit cards and avoid accumulating debt is to spend within your means and only charge what you can afford to pay off in full at the end of the month.

Minimum payments

If you really need to charge something you wouldn’t otherwise be able to afford, you should aim to pay at least $10 more than the minimum payment.

This alone can save you thousands of dollars in interest payments in the long run.

Calculating interest

There are many online calculators that will show you how much interest you will end up paying if you only make the minimum payments, as well as how many minimum payments you will need to make in order to pay off your balance in full.

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