One of the greatest things about credit cards is that users do not have to pay any interest so long as they always pay their entire statement balance in full and on time each month. Yet most cardholders inevitably discover themselves unable to live up to this ideal. Invariably, most credit card users will carry a balance on their purchases and incur interest. While it is easy to make the minimum payment and neglect the ultimate costs of their purchases, cardholders must consider the financial consequences. Visa offers its Practical Money Skills for Life web page in order to illustrate the true cost of credit card purchases.
For example, consider a cardholder who charges a $3,000 cruise only to make monthly payments of $120. At a 10% interest rate, it would take the borrower 29 months to pay off the bill and he or she will have incurred $378 in interest. Yet few cardholders enjoy rates as low as 10%. At a more common, but still low rate of 15%, that same $3,000 purchase will take 31 months to pay off at $120 a month. This time, the cardholder’s total finance charge reaches $621. Finally, a cardholder with a standard APR of 25% will take 36 months, three years, to pay off the charge. By that time, he or she will have incurred $1,281 in finance charges, over 40% of the original price of the cruise.
Using a 0% APR credit card in advance or for a 0% APR balance transfer can eliminate much of this expense, but unfortunately, many don’t turn to these money saving card options until it is too late.
Yet even this scenario underplays the way most people use their credit cards. Rarely would a person simply make one large charge and spend the next two to three years dutifully paying it off. Credit cards are popular methods of payment, and many cardholders wear out the magnetic strip before their cards expire. Once a balance is carried the first month, interest begins to accrue on each new charge from the moment of the transaction. Every trip to the grocery store, every tank of gas, and each cup of coffee are all subject to interest charges immediately after the charge is posted to their account. Then, both the new principal and the additional interest are added to the cardholder’s statement each month.
Given this aspect of how credit cards work, it is no wonder that so many credit card users have found themselves unable to emerge from debt. It is for this reason that Visa has taken the effort to produce its Practical Money Skills for Life web site in order to educate consumers about the true cost of credit card purchases.