Credit Card Interest and How It Works
I am against Credit Cards for the most part, they are really, really bad. When used responsibly, however their rewards can be powerful! However most people have absolutely no idea about credit card interest and how it works. Most people know a little about credit card interest. They also know a little bit about how it keeps you in debt.I know myself and many people wonder about Credit Card Interest and How It Works. And why is it so bad? I mean 18.99%apr can’t really be that bad, right? The funny – not really – thing is about credit cards and it’s interest is it is mathematically, and psychologically set up to maximize your debt load.
Remember this quote by Warren Buffet:
I can’t make 18% on my money, why would you use a credit card when I can’t even make as much of a return?”
Another really bad part of them and the biggest reason I wouldn’t use them is HOW they calculate interest. I found some great points in an amazing article I read, make sure to get the full story here.
An interesting fact about Credit Card Interest and How It Works:
If you have a $100 debt and it accrues 10% interest every month, then the first month you will be charged ten dollars (100 x 0.10). With compound interest, that ten dollars is added to your original debt, so now you have $110 of debt. The second month you are again charged 10% interest, which this time comes out to eleven dollars (110 x 0.10), so now you have $121 of debt.
In general, your APR is supposed to equal the approximate percentage you will pay in interest over the course of a year. However, the actual amount you will pay is often slightly higher than the APR.
These days, most credit cards compound interest on a daily basis, not monthly. For example, let’s say you have a revolving balance of $10,000 on your credit card, and your daily interest rate is 0.041% (which is approximately equivalent to an APR of 15%).
Multiply $10,000 by 0.00041 and you get $4.10, which means you’d pay $4.10 in interest on the first day. On the second day, your balance would be $10,004 and ten cents, and you’d pay interest on that total. Each day going forward, your interest would keep compounding until you had paid it off. Definitely not a pleasant thought!
As you can see credit card companies know how to milk even the smartest people! Remember since the interest is compounding daily, your payments are only compounding monthly. Which means it’s easier to get deeper in debt than it is to climb out of debt. If you do use them, make sure you pay your entire statement balance in full before the due date. If you do want to use them (I do) then use one that has good rewards so you have a good reason to use it. And don’t forget to pay it off!! Make sure to check out why minimum payments are a scam!
Now that you have some more knowledge at your disposal about credit card interest and how it works you will be able to use better judgement. Their almost scam like practices will fail when enough people get educated.Be sure to share this, more people need to understand as much as thy can about credit card debt.