Times are hard these days. It’s understandable why you would want to avoid paying your balance off in full, when it’s easier to carry a note over until next year, paying the balance off over time. The question is, will postponing the full payment cost you more in interest in the long run? How much interest will it cost?
The credit card interest rated is determined by the issuing bank and credit card company. For example, let’s say that CitiBank charges 15% interest. Therefore, a balance of $5,000 would cost about $421 in monthly interest. However, this is only if you pay the balance off in a year, because the monthly payments would be $451. If you were to pay only the minimum monthly payment (which would be $106) it would take you six years to finish the debt. That means you would actually be paying $2,633 in interest, increasing the total balance by over 50%. CitiBank provides their own online calculator tool since some of their credit card contracts have an interest rate less than 15%. Be sure and check out all of our credit card calculators to calculate how much interest you will end up paying if you do not pay off your balance in full, how to calculate your minimum payment, and more.
Be Careful With Your Credit!
Credit writer LaToya Irby posted a page detailing Bank of America’s recent interest hike, saying that this “brutal” increase could cost some customers up to three times the interest they are currently paying. She also mentioned that the bank offers an “opt-out” deal which allows old contract customers the option to pay off the balance under the old rate, but that this requires the customer to abstain from new purchases under the new terms.
In fact, credit card companies and banks have the right to slap your account with interests, fees and penalties, until the balance is paid off in full. This situation is all the more precarious if you are falling behind on your minimum monthly payments. In fact, the credit company will usually increase the interest rate as soon as you start missing payments.
The question remains how does the credit card company calculate the interest? Remember that the interest is what makes the credit card company money, so it’s predictable that this interest rate is going to be higher than the average loan. The average rate of credit card interest can be anywhere from 6%-36%. The lower the interest rate the more likely that the loan is secured by some form of collateral. This seems unusually high—until you consider the fact that other countries such as Brazil have interest rates soaring up to 50%.
In the U.S. interest for credit card debt is charged configured by APR. Under the United States Regulation Z of the Truth in Lending Act there are four different methods a credit card company can use to calculate interest. They include: average daily balance, adjusted balance, previous balance and two-cycle average daily balance.
The Value of Paying Off Debt Quickly
Ramit Sethi, the New York Times best-selling author of “I Will Teach You To Be Rich”, states that it really doesn’t matter what the interest rate is. He breaks down a simple formula, which he adds, many buyers are actually ignorant of. If a person had a $10,000 balance on their account and he or she were only able to make minimum monthly payments (which would be about $250 a month) the total loan would run the course of eight years or 452 months. That means that the total cost of a $10,000 balance would cost you over $19,000 in interest, making a grand total of $30,000. For a $10,000 credit loan! No wonder Ramit recommends avoiding carrying a balance at all and resisting the urge to buy anything that you can’t pay off in a few months time. The author also warns consumers about getting too excited over temporary 0% interest advertisements. After all, if the credit card company can afford to give you 0% interest for 6-12 months, they have already done their research and are fairly sure you cannot pay the loan off for years to come.
What about the option of doing a balance transfer? MP Dunleavey of Money Central warns consumers that low-interest balance-transfer cards are actually one of the three worst debt consolidation moves. This is because those great new rates only last for a few months and you will end up owing the same amount or more in the long run. Furthermore, this activity can affect your credit score and you may lose points for opening another debt.
Sources of Help for Paying off Your Balance
If you need help in paying off your debt then it might help to seek the assistance of a legitimate debt consolidation company. Not every company will provide helpful services. The ones that do will refinance the loan for you, as opposed to just claiming to negotiate with the credit card company.
If you haven’t decided on a credit card yet, then now is the time to slow down and carefully consider your options. Protect your credit while you can. It might help you tremendously to compare credit card interest rates using an independent tool like our credit “Chaser” tool. This will help you compare rates and get the best contract possible. Get started comparing credit cards now!