The common bank card APR sits between 20% and 25%. In case you carry a $5,000 steadiness, you’re $1,000 to $1,250 in curiosity fees yearly. Many individuals underestimate simply how a lot these curiosity funds add up over time.
What makes bank card debt notably harmful is that curiosity compounds every day. Your curiosity fees get added to your steadiness. Then, you pay curiosity on that curiosity the very subsequent day. This creates a snowball impact the place your debt grows quicker than most anticipate.
Most of your minimal fee goes straight to curiosity relatively than decreasing your precise debt. For instance, on a $3,000 steadiness with a 24% APR, a $90 minimal fee may solely scale back your principal by $30. The opposite $60 goes to curiosity funds. This creates a cycle the place your steadiness 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 alerts to credit score bureaus that you simply’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.