Credit card companies charge interest on the unpaid balance owed. The interest is charged every month, and, although the calculation seems simple enough, balances seem to grow at a much faster rate than what is expected.
Take a credit card at 10% per annum interest and a $39 per year annual fee. When you first get the card, you owe the $39.00. Then you use it for $1000. Now you owe $1039, plus interest figured on that amount for a total of $1047.66. If you don’t make a payment, the credit card company will add a late charge, typically .5%, so your total will be $1052.90.
If that isn’t paid after a month more interest and more late charges are added. At 10% per year, after a year, you will owe $1,212.53. And that assumes you are still eligible for the 10% interest rate. Most credit card companies raise the rates once you are late in your payments and it’s not unusual to see cards at interest of 30% or more.
Even if you make minimum payments of $50 a month, and don’t use the card any further, you will still owe $519.52 after a year. So, you borrowed $1000, paid a $39 fee for the privilege, and paid $600 (twelve payments of $50 each), and you still owe $519.52! And of course, since it’s been a year, another $39 annual fee is assessed bringing your total to $558.52.
