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How Interest Rates Affect Your Costs

How Interest Rates Affect Your Costs

For people with good credit, the assumption is that the credit card interest rates are a good deal. However, people with bad credit understand that credit card rates, fees, and service charges aren’t as favorable as someone with a better credit history. How much better are the statements between people with good and bad credit? The following chart provides an example of these differences.

credit-card-interest-rates-by-credit-score

Credit Card Payments – How Much Should You Pay?

For many consumers, paying off your credit cards a little at a time is the best strategy to completely pay off debt. But the amount of interest might be a surprise. Even paying twice the minimum payment is a good start, but might not give you the expected pay off and pay down power you are after, especially is the interest rate is high.

One of the key factors to look for in credit card offers is the amount of interest. For example, if the credit card debt is $5,000, with the expected pay-off date 12 months later, then an interest rate of 5 percent will require a monthly payment of $428.04 to guarantee a zero balance in one year’s time. In the end, you will have paid $136.48 in interest charges. Not too shabby, but if your credit isn’t stellar, there is no way your interest rate is set at a paltry 5 percent.

interest-rate-comparison

How Higher Interest Rates Affect Monthly Payments

One of the realities of having bad credit is that when you are able to find a company willing to extend you a credit line, you will pay much higher interest rates for it. A common interest rate for poor credit is 21 percent or more. This makes the same $$5,000 debt look very different. To pay it off in the same 12 months, your payments are now more than $37.00 higher per month at $465.57. But the increase in the monthly payment is minor compared to the total interest charged once the debt is paid in full. With a 21 percent interest rate, the monthly payment is $586.84, $450.36 higher than the good credit interest rate of 5 percent. The grand total is much larger for the same $5,000 of debt. Interest rates don’t stop at 21 percent either. Some credit cards carry interest rates of 29-35% or higher.

Credit Danger For Missed Payments

If your interest rate is closer to the 5 percent, there is no guarantee that it will stay there. One late payment could send your interest rate rocketing up to that 29 percent in just one billing cycle. Here is where it is important to read the fine print that comes with your statement each month. Penalties and interest charges due to mismanagement of your account are clearly spelled out and can be downright scary.

Higher interest rates are not the only measure of a credit card for good credit versus a credit card for bad credit. Always compare associated fees and account charges. Annual fees, add-on charges for cash advances, and other variables are all important to consider before signing up for a new credit card.

In the end, the only real way to be certain your credit card payments will stay low, interest fees remain manageable, and a credit score will improve or stay high is to keep on top of your credit accounts. Paying them off in full each month is best, and being certain to avoid extending your credit beyond your income will keep you sitting pretty

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