Finance Credit Check

Credit Card Interest Rates – Why It's Important to Understand How They Work

Einstein put it best when he said: "Complex interest is the greatest mathematical discovery of all time." Now you need to ask the question: “Do I want this force to work for me or against me?” If you have a credit card and you transfer balances from month to month, then you have this amazing power, which is called compound interest, working against you.

In this article I will try to explain how this “power” works against you month after month, in the form of interest for interest. And, perhaps, helping you better understand how this “power” works and how important it is even a small change in the interest rate at which you are credited with money affects your financial future. And I hope this will also inspire and encourage you to do everything possible to pay off your credit cards and initiate some type of savings plan so that you can use this “power” for yourself.

Credit Card Interest Rates Compiled

The interest that you pay on the balances on your credit card is complex, which means that you pay interest on the interest for the previous month. A simple example would be that if you are charged an interest rate of 2% per month, you will not pay 24% per year. In fact, you would pay 26.82%. The trick that credit card companies use to get an extra point or two percent is to calculate the interest on a monthly basis, rather than annually. You pay more, but don’t know that you pay more.

Puzzle

Here is a little puzzle based on what you have already learned. Would you rather have $ 1 million in cash or $ 10,000 in a savings account, bringing you a combined interest rate of 20 percent per year?

Hmm, let's see how these 10,000 dollars grow in 10 years – $ 61,917 or 20 years – $ 383,375 or 30 years – $ 2,373,763 or 50 years – $ 563,475,143.

In fifty years, you will have more than 500 million dollars. Of course, you would have to take inflation into account, and if we used the rate of 5% per year, these $ 500 million would have a purchasing power of $ 10,732,859 today. A good return on your investment of $ 10,000, but also, this is another lesson in how a difficult inflation destroys wealth, but this is the topic of another article.

Clearly, this question was a bit complicated because there are so many variables to take into account that will influence which decision you ultimately make – but you understand my point of view, the ability to build interest, and, by the way … this # 39; s The main way credit card companies make their money is powerful "power." This is also the way that pensions work, and the reason that the price of things seems to go up dramatically when you get older. To be afraid … or at least be very cautious of the growing interest.

Complicated interest can really add up
Now let's look at a more realistic example. Suppose you have an average unpaid balance of $ 1,000 on a credit card with an APR of 15 percent.

Interest for the first year will be $ 150. However, this amount is then transferred and added to the balance sheet, and interest is accrued on it. As a result, annual interest will be another $ 172.50 for a total of $ 1,322.50, and it will grow year after year. The third, fourth and fifth year would have looked like this: $ 1,520, $ 1,749 and $ 2,011.

As you can clearly see, in only five years at 15% you would have to borrow twice as much, and in 10 years – four times. I know this is hard to believe, but once again this simple example of the "real world" clearly demonstrates the power of growing interest.

If you let something like this hold out long enough, you will end up paying the same amount of debt for many years and end up returning many times what you originally lent, and in some cases you still couldn’t fully satisfy the initial debt, Unfortunately, most people just do not take the time to think it over, and they feel that high and endless payments are just their fault that they spent too much money to start with.

Three percent difference

You may feel that the difference between a credit card that charges an APR of 15% per annum and a credit card that charges an APR of 12% is not that big, but after reading this article I’m sure that you’re ; we realized that there is so – that’s exactly what I’m going to show you. Remember the previous example, which showed that you owe more than $ 2,000 five years later at 15% after borrowing the original amount of $ 1,000.

The same example with 12% shows the following: the first year – 1120 US dollars, the second year – 1254 US dollars and three years after five – 14040 US dollars, 1573 US dollars and 1762 US dollars respectively. After the same five-year period, you would have saved almost $ 250, or almost 25%, as a percentage of the simple 3% difference in APR. Very dramatic, and I hope this helps you convince you to make the necessary decisions to pay off your credit cards and start saving so that you can put the “greatest mathematical discovery of all time” for you … and not against you.

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