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The True Price of Credit: How Much Are you Really Paying?

smiling woman with credit card

Buying with plastic can cost you little or plenty, depending on how you use it. Knowing the true price of credit before you charge can save countless dollars and hours of anxiety.

Be aware of your grace period. Typically between 21 to 30 days, this is the time you have before interest is assessed. Some creditors only charge interest on carried-over balances. Generally, there is no grace period for cash advances. Interest accumulates immediately, and in most cases you will also be charged a service fee, making this a very costly form of credit.

Currently, the average credit card annual percentage rate (APR) is around 15%, but make two late payments and it can skyrocket into the twenties. Though seductively low introductory and balance transfer rates do exist, such deals expire quickly. Compare a $2,000 debt with 15% APR with the same balance, but 25% APR:

Balance

$2,000.00

Payment

$50.00

APR

15%

25%

Finance charge

$790

$2,345

Pay-off time

4 years, 8 months

7 years, 3 months

There are numerous fees to be aware of—and avoid. Some issuers charge annual, inactivity, and closure fees. Creditors who charge such fees target an uninformed population, or those whose credit is already damaged.

Forgot to pay your credit card bill? Pre-dating your check and hoping they won’t notice is a good (but futile) try. Chances are you’ll be assessed a late fee, generally between $15 and $35 (dependent on the number of occurrences and balance on the account), if you are just a day late from when your payment is due.

Over-the-limit fees are another type of penalty. If you are already teetering at your credit limit, one late fee can push you over, and you will be charged an additional fee until you pay the balance down. However, ever since the Credit CARD Act of 2009, borrowers have to opt in in order to spend over the limit before getting charged a fee. Many credit card companies have done away with this fee and option altogether.

Understanding the true price of credit before making purchases can help you make wise decisions. By keeping balances low, paying on time, and researching your credit options carefully, you can keep the costs—and aggravation—to a minimum.

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