Credit Cards

Interest Rates (Oct. 2020)

12.99% - 22.89%

Source: WalletHub1

What are Credit Cards?

Credit cards are those fun little plastic cards you can use to pay for almost anything at a store or online! When you are approved for a credit card, you are given a "line of credit" which is really just a limit on how much you can spend before they stop you and you have to pay some of it back before you can buy more. With a credit card, you aren't on a specific payment schedule for a specific amount of money; you can keep charging up to the limit, as long as you have the card. This is called "revolving credit."

So I can buy anything I need with this? Sounds great! What's the catch? The catch is that the interest rate is enormously higher than all other types of debt we've talked about (the previous discussed was 14.39% for auto loans which is the absolute worst in that category and uncommonly high). Credit cards start at 12.99% at time of writing, and easily can have interest rates as high as 20% or more annually. Also, compare this to all of the assets we discussed. The highest growth rate was 10.0% annual average for stock market index funds, but only over 15+ years, and this is not even guaranteed.

Credit card debt is often going to grow at double the rate of even our most profitable, yet uncertain, investment, guaranteed, for any length of time. This is one debt you want to be very careful with.

Are Credit Cards Always Bad?

Despite all of the above, no, credit cards are not always bad! The reason is that the interest you accrue will only be tacked on if you don't pay off your balance in full each month. If you do, you don't pay any interest, and get to use the card at no cost beyond what you would pay for the goods and services you bought with it.

Using credit cards in this way can actually be good for your finances for the following reasons:

  • Credit cards have better fraud protection than debit cards or checks.
  • Using credit cards will help build your credit score and increase it over time.
  • Credit cards often give "rewards points" for each purchase which is almost like being paid free money just for using the card.
  • Often, for signing up for the card, you can get a sign up bonus of points which can be worth hundreds of dollars.

How Much Do Credit Cards Cost in Interest?

As mentioned above, credit card debt will grow faster than almost any other debt, and much faster than you can make on investments. Plug in some numbers below to see how much you would pay in interest on a credit card balance.

$

Months

%

Enter a value from 12.99 to 22.89

Results

Monthly Payment$49.92
Total Paid in Interest$198.18
Total Cost to You$1,198.18

References

  1. Credit Card Interest Rates: Types & Current Rates. WalletHub. Accessed 10/4/2020.
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