How much impact can interest costs really have?



Keep in mind that credit card issuers are making a hefty profit through cardholder fees and the interest that unpaid debt steadily accrues. Credit card companies love students and young adults, who are typically less financially stable and mature than older, employed adults. They are counting on people like YOU not feeling the sting at the time of purchase and then being unable to pay your credit card bill in full each month—a setback that can dig you into a deep financial hole. However you may try to rationalize it, going into credit card debt is never a reasonable decision. Exhaust all other options before borrowing from a credit card company.

The average interest rate on unpaid credit card balances is around 15%. Interest is assessed monthly. The interest rate on a home mortgage or a car is closer to 4%, because the lender is secured by holding the title to the home or car as collateral. Is 15% interest a big deal? The following table shows how much interest you would end up paying using various repayment rates, if you spent $2000 on your credit card:

The Real Cost of Credit Card Debt*
Amount Borrowed$2,000$2,000$2,000$2,000
Interest Rate15%15%15%15%
Payment Rate2%4%8%20%
Initial Payment$40$80$160$200
Est. # of years in repayment14742
Total Payments$4,246$2,785$2,348$2,130
Total Interest$2,246$785$348$130

*This table assumes minimum payment rate of 2% or $20, which ever is greater.

Use your credit card wisely. As you can see, it can take fourteen years to pay off a large purchase you can’t afford, and you can end up paying double the purchase price. For additional payoff scenarios, check out this credit card calculator.