By John Campbell
Use your credit card to make a purchase and you may end up paying a lot more for your purchase in the long run.
Sometimes you can’t resist using your card. You see an item on sale that you want right now. Maybe you’re a little strapped for cash and need to make a purchase that can’t wait until tomorrow. Regardless of your reasons for using credit, the longer you wait to pay off your purchases the more expensive they’ll become.
Every purchase you make with a credit card is added to your card’s outstanding balance each month. Any balance that doesn’t get paid off before the grace period ends will be added to the outstanding balance and accrue interest. The more your balance grows the more you’ll pay in interest fees each month - a simple mathematical fact.
If you want to know the true cost of anything you purchase with your credit cards you’ll need to do some math on your own. Don’t let this intimidate you if your math skills aren’t the greatest. You can use a calculator!
What you are looking for in regards to the interest you’ll pay is the periodic rate. The periodic rate is a monthly interest charge calculated from the annual percentage rate (APR) of your credit card.
To find your periodic rate you need to divide your credit card’s APR by 12, for each month of the year. Once you establish your periodic rate you multiply that by whatever your outstanding balance is. The final total is then subtracted from your outstanding balance to calculate exactly how much you’ll spend in interest each month on the balance.
For example, let’s say you want to make a $500 purchase but want to know how much the monthly interest will be on your balance. If your credit card APR is 12.9 percent you will divide that by 12, resulting in a figure of 1.075. When you multiply $500 by 1.075 you’ll end up with a total of $537.50. Once you do the final round of subtraction you’ll end up with a monthly interest charge of $37.50 on a $500 balance. Will the extra monthly fees be worth making your purchase with a credit card now?
Calculating the periodic rate of a potential credit card purchase is an excellent way to determine if the price is really right. If you want to buy an item just because it’s on sale, the interest you pay could quickly make the item cost far more than what it’s on sale for.
The real periodic rate is always determined by your full outstanding balance. If your interest payments are getting too high for your comfort level you’ll want to cut back on using your credit card until you get more of your balance paid off.
With just a little simple math you’ll be able to find out the true costs of any purchase you may make with your credit cards. Knowing the true costs will encourage you to use your credit responsibly and may actually save you some money in the long run.
The choice, as always, is yours. Make an informed one.
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John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.
