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| Cost Of Credit Cards Formula: Yearly costs = (Interest rate * balance) + fees Monthly costs = (yearly costs) / 12 | |||
Cost Of Credit Cards Definition Credit cards may seem like they offer you easy access to extra money to extend your income. But the credit lines extended by credit card companies often come with heavy penalties, fees and high interest rates. To find out how much your credit card is really costing you, you must take all of these factors into account. With this helpful calculator and a little knowledge about the type of credit card that you have, you can find out just how much that extra income is costing you. Credit Balance The Cost of Credit Cards Calculator works best if you take one credit card at a time. Pull out your most recent statement. Look for the credit balance on the statement. Subtract any payment you have submitted and enter that number into the “credit balance” box in dollars. Interest Rate The credit balance on your monthly statement can be misleading. At first glance, the balance seems static. You owe a certain amount of money, you pay off part of that money each month and your balance goes down. But that’s not really how credit cards work. The credit card company charges you interest on the credit balance on your statement. That interest rate is a percentage of your credit balance. For example, if you have a 14.9% Annual Percentage Rate or APR, 14.9% of your credit balance is added onto the former balance each month, otherwise known as compounding interest. For example, if you start with a credit balance of $400 and pay $50, you balance next month will not be $350. It will be $354.35 with the Interest Rate added on. To determine the interest rate on your credit card, look on your statement. If you cannot find the interest rate on your credit card statement, call your credit card company to get the exact percentage. Annual Fees On top of annual percentage rates, credit card companies charge an annual fee. Unlike the annual percentage rate which is interest on the money loaned, the annual fee is a charge for the convenience of using the credit card itself. Not every credit card has an annual fee. If yours does not, simply leave the “annual fee” space empty. Credit cards that earn you rewards points, extra security or other premium perks often have an annual fee. The annual fee that each credit card charges varies widely from company to company. The fee may be as small as $20 per year or as large as $400 per year. Whatever the annual fee is, it is a part of your debt. It shows up on most bills in monthly installments that equal one-twelfth of the annual fee. Be sure to enter the entire amount — the yearly, not the monthly figure — of the annual fee in the appropriate space on the Cost of Credit Cards Calculator. Once you enter your information and hit “Calculate!” you’ll discover just how much your current debt will cost you in real dollars. This understanding of your debt is an important step towards getting rid of it. You may discover that what looked like a $5,000 debt is actually closer to $10,000 dollars if you are only able to make the minimum payments. Pay Down Debt The best way to pay down a large debt is to make payments that are larger than the minimum payment determined by the credit card company. Small payments only really pay the credit card company the interest. To bring your balance down, you must eat away at the principle every month. Otherwise, you may end up with that same $5,000 debt even a year down the road. As you start to pay down your debt, come back to the Cost of Credit Cards Calculator frequently. Once every month or two months, make sure that you have an understanding of your real debt with your annual fees and percentage rates taken into account. Keep track of your real debt and you’ll soon be on your way to getting debt free. Check out some of our other credit card calculators like the Credit Card Balance Transfer and the Minimum Payment Calculator How to Calculate Cost Of Credit Cards Let's be honest - sometimes the best cost of credit cards calculator is the one that is easy to use and doesn't require us to even know what the cost of credit cards formula is in the first place! But if you want to know the exact formula for calculating cost of credit cards then please check out the "Formula" box above. |