Editor’s note: This article was first published in October 2014; the 29.08% APR reflects that card at the time, and the expected payoff date of 2023 at the minimum payment was calculated then.
At a given moment, a credit card can get you out of a tight spot, but in this real example we’re going to see how it can wreck your finances: one of those “buy whatever you want and pay a fixed amount each month” credit cards.
In the example below, the credit card has a limit of 3,000 euros, and the user used it up completely. After more than a year of paying between 80 and 90 euros each month, the debt is still more than 2,700 euros.
As the statement shows, of the 82.87 euros this user currently pays, 23.48 euros goes on repaying the debt. In other words, after paying those 82.87 euros, only 23.48 euros is “restored” to the card. The rest of the payment is taken as interest, which comes to 59.39 euros.
Let’s remember that this type of card is one of the personal loans with the highest interest rates on the market.
Although we see an APR of 29.08%, which is outrageous in itself, at least it doesn’t sound so bad. But the truth is that the maximum total interest, as the small print points out, can reach 3,577%.
You will never find an investment on the market that beats that rate. If this user doesn’t speed up the payments by paying more than the minimum he is currently paying, it will take him until 2023 to pay off his debt.
And if he decides to pay off the whole card in a single payment, he will also have to pay an early repayment penalty. A penalty that can range from 3% up to whatever amount the company has set.
That’s why it’s so important to pay off our credit card debts every month, because once you get caught in the credit spiral, getting out can cost you dearly.
That’s why we always say that you should never make any kind of investment until you’ve got rid of your high-interest debts.
Read: The most profitable, safest and wisest investment is paying off your debts
Further reading
Featured image: Project IDEA, CC BY 2.0, via Flickr.
