Understanding Interest Rates on Credit Card and How it Affects You
Here, we will discuss credit card interest rates and how it affects the average person. We will also break down how to understand interest and how to calculate it so you can see for yourself.
Credit card debt that has high interest rates can have a significant negative impact on your financial health, as well as your personal health. With the average interest rates in the US being the highest they've ever been (about 22% average), we want to point out a few important topics and provide you with some information.
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1.) You Pay Much More Than You Borrowed - High interest rates, (20% - 30%) mean you're charged a large amount in interest every month if you don't pay your balance off in full. Over time, this adds up to thousands of extra dollars paid on top of your original debt.
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- Example: If you owe $5,000 at 25% APR and only make minimum payments and stopped using that card, you could end up paying over $11,000 and stay in debt for more than 10 years.
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2.) Minimum Payments Keep You Trapped - Credit card companies often calculate minimum payments as a small percentage of your overall balance. These payments mostly cover interest, not the principal, so your balance barely goes down each month. When individuals make minimum payments, they can sometimes be paying 70-80% in interest with those payments each month.
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3.) Your Credit Score Can Suffer - High credit card balances hurt your credit utilization ratio - which is a major factor in determining your credit score. Credit utilization makes up 30% of your overall credit score. If your balances are near the credit limits, your score can drop significantly, even if you're making all of your payments, and make it more difficult to get approved for loans in the future, or better rates for that matter.
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4.) It Will Limit Your Financial Flexibility - When more of your income goes towards your debts, or interest, you will then have less for:
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Emergency Savings
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Retirement
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Major Purchases
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Enjoying Life
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It can feel like you're working for free, or working just to pay your bills and have nothing else leftover.
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5.) It Increases Financial & Personal Stress - Carrying high interest debt where you make payments without any progress can lead to stress, anxiety, and relationship strain, especially when you may have already been making these payments for quite some time and haven't been able to get from underneath it.
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6.) It Can Snowball Into Bigger Problems - If you rely on credit cards for your daily expenses because you're paying off interest elsewhere or it's affecting your monthly budget, it can create a cycle of:
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More Debt
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Higher Monthly Payments
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Lower Credit Score
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Even Higher Interest Rates or Getting Denied New Credit
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Conclusion - High interest credit card debt can be very expensive and draining. Paying it off quickly or exploring options like debt relief, consolidation, or financial counseling can help you break the cycle and regain control of your financial situation.