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7 Ways Credit Card Interest Can Demolish Your Life Savings

What you don’t know about credit card interest can cost you thousands of dollars. If you’re one of the millions of Americans who carries a balance on your cards, you need to know what you’re up against before that credit card debt cripples your finances.

  1. Credit card companies charge interest daily. So if your credit card has a 15.00% APR, every day they’ll charge you 0.041096% (15%/365) on your balance. Say your credit card balance is $3,000 – that comes with a $1.23 charge today, which doesn’t sound like much, but it adds up fast because…
  2. You’re paying interest on interest, because credit card companies make more money on compounding. Today, that $3,000 balance you had yesterday is $3,001.23.  And today, the company will charge the daily interest on $3,000.23. By the end of two weeks, that daily interest will run up to $17.50 for the month… and that’s if you haven’t bought anything else. (If it was just straight 15% interest, your monthly interest charge would be just $15.00)
  3. Interest gets charged on your average daily balance, which really means the average amount of unpaid balance each month. Say you start the month with a $3,000 balance, then make a $500 payment two weeks in (day 14), and another $500 payment a week later (day 21). Your average daily balance would be calculated like this: (13 x $3000 + 7 x $2500 + 10 x $2000)/30 = $2,500. Interest gets charged on that $2,500, not the $2,000 you ended the month with.
  4. If you didn’t pay off your whole balance last month, but pay it in full this month, you’ll still be charged interest the month you paid in full. That’s because you lost your “grace period” (the time between end of the credit card billing cycle and the payment due date) last month, so the interest gets charged retroactively for last month and again for this month.
  5. If you miss a payment, you can be punished with a higher penalty interest rate going forward. When this kicks in is different for different cards, so check your credit card agreement – some may attack with higher interest after a single missed payment.
  6. The credit card company can charge different interest rates for balance transfers and cash advances. So if you have a card with a 15.00% APR (even though the actual rate you pay is really higher than that because of compounding), the company could charge even more for other features. Plus, many credit card companies do not give you a grace period for things like cash advances, so the interest clock starts running on day one.
  7. Your payments go toward interest first. If your balance last month was $3,000, plus a $17.50 interest charge, and you make a $60 minimum payment, only $42.50 of that goes toward paying down your balance. Between that and compounding, you could end up paying more in interest than the whole amount you charged.

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