How much are you paying?
Basically, interest is what you pay the lender for using their money and it’s usually charged on a yearly basis as a percentage of what you owe. Over time, this can add up. Every time you make a payment on your debt, your balance drops, so the interest you would owe the next time also goes down. Paying back your debt as soon as you can afford it helps you pay less interest overall.
What happens if you keep that balance on the account though? The bigger the balance on the card and the smaller the amount you pay each month, the longer it’s going to take for you to pay it off and the more interest you pay overall. Bottom line, you pay a lot more for what you purchased.
But is interest really that bad? Loans and credit cards have a minimum monthly payment, which is usually not too demanding. You might ask, “Couldn’t I just keep paying the minimum?” You could, but it’ll hurt. Let’s look at an example using credit cards.
Here’s the situation. You want to buy an Xbox 360 that sells for $160 and / or go on vacation, which you expect to cost $490. You decide to pay the $15 a month minimum, and the card has an APR of 18%. This is what it works out to:
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