Cashtoons

The Real Cost of Credit Card Debt

June 18, 2021

I once saw a bank give away personal pizzas across the street from a college campus for students who would sign up for a credit card. I heard a murmur ripple through the court yard: Free pizza?

pizza

Heads turned. Free Pizza! A line was forming. I remember thinking, I wonder how much that pizza is actually costing?

Well, let’s say that you are not paying any extra fees. The bank just charges you 18% in interest on the money you owe. (They might call this your annual percentage rate (APR).)

interest rate

How much would this be per month? It depends on the amount you owe.

That 18% is for the whole year, so we can get interest per day here:

18%/360 = 0.05%

Ok. Now how much would that be for a month (about 30 days):

0.05% x 30 = 1.5%

Lastly, How much did you borrow? Let’s say you’re having car trouble. It costs $1,500 to get it fixed.

car

This is unexpected, and you’re a little strapped this month, so you put it on your credit card. How much interest will you owe per month for this balance?

1.5/100 = 0.015

0.015 x 1500 = $22.50

Okay, so $22.50 per month in interest. That might be doable. The next week is a little tight too, so you just pay the minimum payment of $25.

interest rate and principal

Where does this end up? Come back next Saturday to find out.

sources

https://www.thebalance.com/annual-percentage-rate-apr-315533

https://www.thebalance.com/the-true-cost-of-credit-cards-1289627

https://www.cnn.com/2021/02/22/success/credit-card-payoff-calculator/index.html

https://wallethub.com/edu/cc/average-credit-card-interest-rate/50841


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