Credit cards are usually the way to pay as we move forward more into the future for things we have to buy instantly. They’re convenient and widely accepted. If you pay off your credit card balance monthly, a credit card is definitely an affordable way to build your credit profile and finance a purchase that you know that you will be able to pay back the following month.
In another hand, if you have a tendency to pay only minimum amounts, or have to purchase something expensive that you know that you are not capable to pay it off the following month, a personal loan could be a more strategic and affordable option for you.
Carrying a balance will get expensive real quick
If you make minimum payments or have a tendency to carry a balance month to month, it’s important to comprehend what it might be costing you.
Interest paid on credit cards is commonly expressed as the Annual Percentage Rate, or APR, which considers the expense of interest along with other costs connected with credit, for instance, certain fees. There’s a wide variety of rates you might pay, depending on the card brand as well as your credit history. Such as an APR, for someone with a great credit score with score above 740, could possibly get 12%. APR for someone with an unhealthy credit score with under 580, could get beyond 30%. Learn more about our rates and fees.
If you pay the entire balance on your credit card on a monthly basis and most importantly, on time, you won’t be charged any interest. But if you don’t pay in full, the next month’s balance should include any purchases you made, plus interest on what you didn’t pay last month. That’s why paying the minimum on a credit card, or carrying a balance, really can cost you. It could also take a lengthy time to get out of debt. If you’re able to avoid making minimum payments, you’ll be better off in the long run.
Are you aware you could be paying interest on interest?
Credit card interest is compounding interest. Which means new interest is calculated on both your unpaid principal amount and any unpaid interest. Most credit card companies add unpaid interest to the key balance, and for that reason usually do not split up between interest you borrowed from them and the amount of money you borrowed to make a purchase. So, even if the stated APR on your credit card is low, what you ultimately pay in interest could be much higher.
Ever felt like you’re making on-time payments but making no progress?
If you’re making minimum payments on your credit card on a monthly basis, it could take you a very long time to pay it off. Simply review your latest credit card statement to observe how long it would take to pay off your card based on minimum payments alone. For many people, it will take years, and they could end up paying far more to borrow the money compared to the cost of the initial purchase.
It’s hard to make progress towards being debt free when you borrowed from increasingly more interest each month.