The Truth About Credit Card Costs

Why are credit cards a problem? The answer is simple:

Purchases made on credit cards can cost you a lot of money.

So you go to the store and buy a pair of pants for $100. You pay with your credit card. How much did your pants cost?

If you paid cash, the answer is $100.

If you used your credit card, the answer depends on the interest rate the credit card company charges you, and how long it takes you to pay off the loan.

If you used a department store credit card that carries an interest rate of 22%, and if each month you only paid the minimum monthly payment (generally 3% of the outstanding balance, plus interest), and if it takes you five years to pay off the entire balance, you would end up paying $50 in interest.

Therefore, if you pay by credit card, the pants could cost you $150.

Of course if you pay off the card sooner, the interest costs are lower. If your credit card charges an annual or monthly fee, the cost is higher.

The key point to remember is this:

If you don't pay your balance in full each month, credit cards greatly increase the cost of everything you buy.

Try the government of Canada's Credit Card Cost Calculator to determine the actual cost of various credit cards.

Maybe you think you can lower your credit card costs by taking advantage of one of those "low introductory rate" offers? Read on to find out if low introductory rate credit cards deals are as good as they sound.