Credit Cards Without Getting Burned

The story: Marcus and the minimum

Marcus reads a card statement at a kitchen table and compares paying the minimum with paying more each month.

1. Narrator: Marcus put $3,000 of work tools on a credit card. The first statement just arrived.
2. Marcus: The minimum due is only $90. That’s easy.
3. Narrator: At an example 24% APR, paying only the minimum would take about 15 years and cost about $4,890 in interest.
4. Marcus: More in interest than the tools cost?
5. Narrator: A fixed $150 a month pays it off in about two years, with about $870 in interest. Paying in full means no interest at all.
6. Marcus: So the card is free to use only when the full statement balance gets paid each month.
7. Narrator: Paid in full every month, a card charges no interest.

What you’ll learn

1. Three balances, three meanings

   The statement balance is what you owed when the bill was made. The current balance adds newer purchases. The minimum payment is the least you can pay without a late fee. Paying the statement balance in full avoids interest.

2. The card grace period

   The card grace period is the time between the statement and the due date. Pay the full statement balance by the due date and purchases cost no interest. Carry a balance and you lose it: new purchases charge interest until you pay in full again.

3. The minimum-payment trap

   Interest is set by the card’s APR: the yearly cost of borrowing, as a percent. A minimum payment is mostly that month’s interest plus a small slice of the balance, so the balance shrinks slowly. Paying only the minimum can take years and cost more in interest than the purchase did.

   Example: $3,000 at 24% APR, minimum only: about 15 years and $4,890 in interest. At $150 a month: about 2 years and $870.

4. Fees and rewards

   Some cards charge an annual fee or a foreign-transaction fee even when you pay in full. Late fees add up, and cash advances cost more and start charging interest right away. Rewards only come out ahead if you never pay interest.

Key words

statement balance

what you owed when the card’s bill was made

card grace period

the time to pay the statement balance with no interest

APR

the yearly cost of borrowing, as a percent

Also called: annual percentage rate

cash advance

cash taken from a credit card, which costs more and charges interest right away

Common questions

What if I can’t pay the full balance this month?

Paying at least the minimum on time avoids a late fee and a late mark. Paying as much above it as the budget allows cuts the interest. A payoff plan comes in the debt payoff lesson.

Is it bad to have more than one card?

Not by itself. What matters is paying each one on time and keeping balances low. More cards can mean more fees and more to track.

Remember this

Paid in full every month, a card charges no interest.

Try it: Minimum vs a fixed payment

1. Take one card balance, yours or the $3,000 example.
2. In the Loan Payoff Calculator, try paying the minimum, then a fixed monthly amount.
3. Compare the months to pay it off and the total interest.

Loan Payoff Calculator with a card balance, at the minimum vs a fixed payment.

Live facts

Numbers that change over time, with when they were last checked and where they come from.

• Average credit card interest rate (APR)

  Source: Federal Reserve (G.19)(opens in a new tab)