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INTEREST: THE FINE PRINT

Think of a credit card like this: When you charge something, the credit card company is giving you a loan. When you don't pay the whole balance you owe on a credit card, the bank or credit card company charges you interest. The interest you pay is written on your statement—in the fine print. The interest is stated in terms of how much the card company charges per year, so it's called an annual percentage rate (APR).

Your APR can be as high as 25 percent (or more) each year. When you apply for a credit card, typically this information is printed on the application form. If you have been "pre-approved," be sure you understand the APR. You can be unpleasantly surprised if you don't understand what you've agreed to.

Calculate the Interest

To make sure you know how the interest will be calculated, find the APR number on your statement.

Let's say your APR is 18 percent annually. Divide it by 12 (12 months in a year). This will show you how much interest you are being charged monthly (18 percent / 12 = 1.5 percent monthly).

Multiply your monthly interest rate by your credit card balance (this is the total amount you've charged). Let's say you've got a balance of $1,000. One-and-a-half percent, multiplied by 1,000, equals $15.00 (.015 x $1000 = $15). This is the amount of money you're paying every month for interest (also called your finance charges). In a year that money will cost you $180 ($15 x 12 = $180). This is how much it costs you to borrow that $1,000. There may be additional service fees as well.

What can you do about this?

  • Pay it off pronto. If your minimum credit card payment is $10 a month, pay $20. Better yet, pay $100. The sooner you pay it off, the sooner you'll save that $15 every month.

  • Try not to charge. If you can't resist whipping out that card, put it in a safe deposit box in the bank. That way, you'll avoid temptation. Or if you don't really need it, cancel the account.

  • Transfer the balance to a lower interest credit card. (But be careful of cards that offer "an introductory rate" of 2.9 percent interest, for example. The APR may go up substantially after a few months.) Here's a site that can help you compare credit card costs: Bankrate.com.

Stealth Credit Card

When Bradford went to school, his dad gave him a credit card with the instructions that Bradford use the card for emergencies only. That September, Bradford stopped by a table in the student union and filled out a credit card application for a second card—one he could control. (What his dad didn't know wouldn't hurt him, right?) The credit card arrived, and so did the bills. Within four months, Bradford was carrying a $1,000 balance.

If Bradford's card charges 18 percent interest, and he only pays the minimum monthly amount of $20, it will take him almost eight years (93 months!) to pay it off—and that's if he never charges anything again! Plus, when he adds up all the interest, his $1,000 credit balance will end up costing him $1,860.

Now check out the following chart. It shows how, if Bradford adds something extra to his minimum monthly payment, he can slash the amount of time and money it takes to pay off his card.

$$ added to your minimum credit card payment Amount you'll save You'll pay it off this much sooner
$5
$310
31 months
$15 $530 55 months
$25 $645 66 months

Here are Other Areas to Link to:

CREDIT CARD: HANDLE WITH CARE
TERMS AND FEES
USE YOUR CREDIT WISELY
CONTROL YOUR SPENDING

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