The common bank card APR sits between 20% and 25%. In the event you carry a $5,000 stability, you’re taking a look at $1,000 to $1,250 in curiosity expenses yearly. Many individuals underestimate simply how a lot these curiosity funds add up over time.
What makes bank card debt significantly harmful is that curiosity compounds each day. Your curiosity expenses get added to your stability. Then, you pay curiosity on that curiosity the very subsequent day. This creates a snowball impact the place your debt grows sooner than most anticipate.
Most of your minimal fee goes straight to curiosity moderately than decreasing your precise debt. For instance, on a $3,000 stability with a 24% APR, a $90 minimal fee would possibly solely scale back your principal by $30. The opposite $60 goes to curiosity funds. This creates a cycle the place your stability barely decreases month after month.
This high-interest debt additionally damages your credit score rating by growing your credit score utilization ratio. A excessive ratio indicators to credit score bureaus that you just’re relying too closely on credit score, which might drop your rating considerably. Many individuals don’t understand their credit score rating suffers even when they make all their minimal funds on time.
