Credit Cards: Know What the Bank is Charging You

bank charging rate
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Credit Cards are a convenience. It’s fast and easy to pay for goods or services with just one click of a button or one swipe. Most of us use it every day, but have you ever wondered exactly what the bank will charge you if you carry a balance?

I got my first credit card in college when I needed books and wanted to pay for a class ring. As a new borrower of credit, my interest rate on my card was 24.99%. I sort of knew what the interest was for, but at the time all I cared about was the minimum monthly payment and whether I had enough to cover it when it was due. No one told me what the financial consequences were of having a credit card balance. If someone did, I didn’t listen because it was more important for me to fit in and have somewhat of a social life. I was envious of people who could afford nice things, live in an apartment instead of the dorms, and have their own car.

Being poor and not having an allowance limited my college social life until I got my credit card. I had a part time job, I only had 10 hours a week and made minimum wage. With my new card, I could go out to the movies, pay for dinner, and go on spring break like most of my friends. I paid at least the minimum and the card company loved me. Why else would they raise my limit?

If you have credit card debt, I encourage you to get your calculator and know exactly what the bank is making off of your credit card balance every month. Actual monthly charges will vary because interest accrues daily and the days in a month differ. For simplicity, the formula is below.

(Your interest rate / 12 months) x credit card balance = Monthly Interest Charge

Using my interest rate as an example and a credit card balance of $5000, the monthly interest charge is:

(24.99%/12) x $5,000 = $104.25

At this interest rate, the bank is earning 2% a month off of the balance that I owe. To put that into perspective, my savings account is accruing 0.95% a YEAR! No wonder the banks loved me. And if you have credit card debt, they love you too.

If you have credit card debt and aren’t sure how to pay it off, don’t feel discouraged. You have options. You can pay someone to help you (I almost did) or better yet, continue reading. If I had credit card debt, this is what I would do:

    • Create a budget to identify how much extra I could save every month to help pay down the debt.
    • Stop using the credit card.
    • Transfer the balance to another card with a 0% or low introductory interest rate. This will significantly decrease or eliminate monthly interest charges for a certain period.
      • There will be a one-time transfer fee. From my experience, this can vary from 2% to 5%.
    • DO NOT ADD to the debt (whether it’s this card or another card).
    • Pay off the debt

To help you get started with identifying what you can afford and how soon you can pay off your debt, here is a loan calculator template. This one is from Microsoft that I tweaked a little with instructions. It can also be used to pay off student loans, car loans, mortgages, or any kind of loan that accrues interest.

Again, don’t feel discouraged or ashamed of having credit card debt. Sometimes we have to experience these things in order for us to learn.

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