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Carrying a long-term balance on your credit card isn’t good, everyone knows it. But sometimes life happens and we don’t have a choice on carrying a balance. But, as long as you can pay the minimum payment at the end of the month, who cares? It’s all good. But is it really?

If you pay off your balance before the end of the month, every month, congratulations! You’re in the clear. But if you carry a balance (the Canadian average is almost $4,000), then you may want to keep reading.

Compound interest is a sneaky term credit card companies use to hide their true costs. An annual percentage rate (API) of 20% is standard in Canada, but most people don’t realize that the interest is often compounded daily. That daily amount of accrued interest is applied to the principle, which means the longer that balance remains unpaid, the deeper the debtor sinks into debt. The real cost of credit cards is much greater than most imagine.

Interest, principle, and payments are confusing, so it helps to have real-number examples. Let’s say you owe $1,000 on your credit card, and your daily interest rate is 0.55% (roughly 20% APR). In the first day, you’d owe $5.50. On the second day, you would be paying interest on a total balance of $1,005.50. If you paid only minimum payments, it would take 109 months to pay off, and you would spend $1,628 over the initial $1,000.

An example using $1,000

If you owe $1,000 on your credit card (20% APR is a pretty standard Canadian rate) and you pay only the minimum payment (2%) each month, it would take you 109 months to pay off your debt and it will cost you $1,628 in interest (on top of the $1,000 you owe).

Want to see for yourself? Check out this credit card debt calculator as well as this daily interest calculator.

Some other quick facts about credit cards:

Credit card cash advances are charged EVEN MORE interest, often by 2 to 4 percentage points – and you don’t get a grace period (to the end of the month. The interest starts getting charged immediately.

Be aware, if you have been talked into taking credit card balance insurance, the amount is calculated based on the amount owing on your card. The more you owe, the more you pay.

An alternative to carrying a large credit card balance or using credit card cash advance is a quick, easy payday loan. At Pay2Day, we are very upfront about the costs associated with our loans, and we provide hassle-free access to cash without the difficult language and complex interest rates of credit cards.

A payday loan makes keeping your debt repayment small, timely & manageable. Need some cash? Get some cash. Pay it back on your next payday. Easy.

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