How Interest Rates Affect Your Costs

If you have good credit, you are probably under the impression that your credit card is a pretty good deal. If you have bad credit, you know your credit card rates, fees, and service charges aren’t as good as someone sporting a niftier credit history than yours, but do you know exactly how much better off your credit card statements could look?
Unless you have an advanced degree in accounting economics and like doing recreational math problems, then you are probably like the rest of us: paying off your credit cards a bit at a time hoping to see your efforts chip steadily away at your balance until it reaches zero. Running the numbers might surprise you. Doubling your minimum payment is great, but might not give you the expected pay off and pay down power you are after.
It is great news for the vast majority of the population whose definition of employment or enjoyment does not include the computation of compound interest; however, there are those brainiacs who are just weird in their love of complex math. They can do the math for us. One such example assumes a credit card debt of $5000 paid off in one year’s time. If your interest rate is set at 5%, your payment will need to be $428.04 monthly 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%.
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% or more. This makes the same $5000 dollar debt look very different. To pay it off in the same 12 months, your payments are now over $37.00 higher per month at $465.57. But the increase in the monthly payment is a mere love tap when compared to the bulked up total in interest charges. At 21% interest, you would end up paying $586.84, which is $450.36 more than the good credit rate of 5% winds up paying for the same $5k. Interest rates don’t cap at 21% either. Some bad credit cards carry interest fees of 29-35% or more.
Don’t get too smug if your interest rate is closer to the 5%, because that is not a guarantee it will always be that way. One late payment could send your interest rate rocketing up to that 29% rate in a matter of one billing cycle. If you don’t believe it, check the fine print that comes with your statement each month. Penalties and interest charges due to mismanagement of your account are printed there, and they can be downright scary.
Higher interest rates are not the only measure of a credit card for good credit vs. a credit card for bad credit. To compare other fees and account charges click the graphic to the left.


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.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.

http://www.creditloan.com/blog/2011/08/24/how-interest-rates-affect-your-costs/