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What Banks Will Never Tell You About Credit Cards

Posted by admin on August 22nd, 2007 filed in Uncategorized


The Seduction And Danger Of Credit Cards

We have probably seen people crash and burn with credit cards but it is instructive to see the basic mechanism by which they operate. Lets say you have a credit card with a $6500 limit on it and you keep it current so you enjoy a pretty decent APR of 13.99%. You also know it is foolish to only pay the minimum amount due so you pay a respectable $100 a month. You carry say a $2500 balance on it. One day however you are at the mall and see this lovely new designer handbag. You don’t have a lot of cash so you pull out the plastic and charge it. Well it’s 50% off anyway and you pay more than the minimum on your card so you go ahead and buy it for $150. But therein lies the first problem: You can’t even BEGIN to pay off this charge until the outstanding balance is paid FIRST. So the charge goes into the “queue” so to speak. The way the credit card companies apply your payments is like this: The payments are first applied to the lowest APR debt first and then the oldest debts. Your shiny new handbag with the $150 price tag is at the end of the line and is last to be paid.

Assume you keep using the card and maintain a $2500 balance on it. So if you keep paying down the balance at $100 a month the handbag wont go to the front of the line until about three years! While sitting in your account it will still accrue interest charges of about $55. Now it will take over a month to pay it off so it will accrue another $1.95 in interest. The real cost of your handbag goes to $206.95.

If you only make the minimum payment due on your credit card it will some 20 years to pay it off! Not only will your handbag be out of fashion by then but probably in the town dump and will have cost you some $500. And of course if you miss a payment you will have to factor in late charges and perhaps an interest hike too. Of course you have also have an “opportunity cost” here too since that money could have been working for you instead of against you draining your checking account. Now multiply this effect with the three or four cards people carry around with them. I have placed a credit card payoff calculator on this page you can use with your credit card balances to get a snapshot of how much you are really paying the credit card companies!

What will it take to pay off my credit card?
Enter your credit card balance: $
Enter the credit card's interest rate: %
Enter payment amount per month: $
or
Enter desired months until debt free:
Powered by:Compare credit cards and find credit card tools and articles at Creditor Web

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Play around with this calculator to see how much you are really paying when using your credit card while maintaining a balance on it.

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