Like most topics, who you speak to about credit cards drastically impacts the narrative of why you should or shouldn’t use them.

So instead of trying to change your mind one way or the other, let’s just look at some facts about credit cards.

How does the interest rate work on my credit card? The interest shown on my statement doesn’t equal my stated APR.

  • To calculate the interest you will be charged each month with an APR of 20%, you’ll need to divide 20% by 12 (months) to find the monthly rate.
  • So, 20% / 12 = 1.66%.

With a balance of $2,000 your interest charge for the month would be calculated as:

  • $2,000 x 1.66% (0.0166) = $33.20

How is my minimum payment calculated?

The two most common calculations are:

  • A flat percentage, typically between 1-3%.
  • Or a combined percentage plus fees and interest.

Why should I pay more than the minimum payment?

  • The interest charged to your account monthly increases your balance. If your minimum payment is at 2% with your monthly interest charges being 1.6%….
    • Payment: $40
    • Interest: $33.20
    • Balance reduced by: $6.80
    • Percentage of the payment that reduced your balance: 17%

What if I use the card and pay it off monthly?

  • If you pay off your credit card each month, then great job, keep accumulating those perks from the credit card company!

Did you know that the standard minimum payment for credit cards was around 5% of the card’s balance in the 1970s?

Andrew Kahr, a financial services consultant, convinced one of the major credit card companies to reduce their minimum payments to 2%, which in turn caused other companies to follow suit, and the 2% became the normal minimum payment percentage in the early 2000s.

This was not to help the consumer by reducing how much they had to pay each month!

Kahr discovered that if the credit card companies lowered the monthly payment, their profits increased due to customers spending more and paying less each month toward their balance, thus extending the payback periods, and increasing interest charges over time.

This is not a post to tell you not to use a credit card, just to point out some interesting information for your weekly blog reading! Reach out to Dave or me if you have any questions.