Credit Card interest rates are generally around 20%, give or take a few percentage points. Let's take an example where the credit card interest rate is 18%, you spent $1,000 for the month (food, clothes, gas, etc.) on that credit card, and only make minimum payments for the next several years. How much did you really spend?
No matter what the interest rate is, the magic number to remember is “72”. Dividing the interest rate into 72 gives you the number of years it takes for your actual interest costs to double. 72 divided by the 18% interest rate is 4. So if you make only minimum payments (which generally are interest only payments) on your credit card, your actual costs increase on the amount charged (an increase of $1,000 in this example) every 4 years.
So after 4 years, that original $1,000 monthly credit card bill costs you minimally $2,000 ($1,000 in interest paid plus $1,000 in principal still owed). To keep it at $2,000 and not go higher, you would need to pay off that $1,000 principal in full immediately after the four years are up. If instead you keep making just minimum card payments, that $1,000 monthly purchase will continue to increase $1,000 in actual interest paid every 4 years, plus you still owe the $1,000 principal, thus costing you $3,000 in 8 years ($2,000 interest paid plus $1,000 principal owed), and $4,000 in 12 years ($3,000 interest paid plus $1,000 in principal owed).
If your credit card interest rate is 24%, then the numbers in the previous example would be the same, except that the timing would be every 3 years (72 divided by 24 equals 3). So your actual costs for that $1,000 monthly charge would be $2,000 after 3 years, $3,000 after 6 years, and $4,000 after 9 years.
Plus if you keep making more monthly credit card charges each month and still keep paying only the minimum charge, your actual costs will continue to zoom up in the same manner for those new credit card charges too.
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