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Money Advice for Life
The Real Cost of Carrying a Balance on a Credit Card
Do you know what it actually costs when you carry a balance on your credit card? We’ve broken it down and even have a tool to figure out how long it might take you to pay off your balance.
Balance is a good thing… right?
Sometimes because of unexpected costs or not enough planning, you end up carrying a balance on your credit card. But what, exactly, does it cost when you don’t pay your credit cards in full each month?
Let’s start by defining a few important terms when it comes to credit:
Principal – The amount you originally borrowed. Yes, anything you spend on your credit card is borrowed money.
Interest – What your credit card charges you for the privilege of borrowing money. This is usually presented as an annual percentage rate.
Compound Interest – Interest that is added to your principal … which is then charged interest. Interest on your interest is how credit card debt can stack up so quickly.
Minimum Payment – The smallest amount of money you can pay in order to keep your credit card and not damage your credit score.
Credit Score – This is essentially a measure of how good you are at fulfilling your financial commitments. A good credit score can help you buy a house or a car, get a loan, start a business, or even get you better interest rates.
Interest grows your debt
Let’s use an example. Say you’ve got $1,000 on a credit card with a 19% interest rate. That’s not bad, right? $1,000 isn’t that much at all, and 19% is a pretty standard interest rate. So, let’s say you put $20 each month toward paying off that debt, which is an approximate minimum payment. Do you want to know how long it would take to pay that balance off? More than eight years! And what would it cost you? About $997, which is basically doubling your debt load! And that’s with only paying off your principal with no additional borrowing.
With compound interest, every dollar you leave on your credit card ends up costing you more and more. It’s a powerful thing that can be used to your advantage when it comes to saving, but that’s another blog post.
The example above is just that, an example, but you can use our repayment calculator to help you figure out exactly what your debt might cost you.
A credit card can be good
There’s an obvious solution here, right? Just don’t get a credit card!
Well … it’s not quite that simple. In order to build credit, you need to use credit. So, if you hope to own a home one day, or even get a car loan, you’ll have to work to build your credit. The best way to do this is to use your credit card and pay off the entire balance each month.
Some good tips on using credit with care are:
Keep your credit limit sensible
Use credit cards for recurring payments that are a regular part of your budget
Plan for larger purchases
Use credit cards to build good credit within your budget, not as a tool to spend more than you earn
If you can’t trust yourself with your cards, leave them at home
See how long it’ll take to pay off your credit card balance
Credit is an important part of your financial life, but carrying a balance, or not managing it well can lead to a struggle with debt. Try our repayment calculator and remember that debt is something that can happen to any of us, so never be embarrassed to talk about it.
Did you learn something about credit cards? Are there other questions you still have about them? Let’s talk about it in the comments.