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Deciphering your Credit Card Interest

Deciphering Credit Card Interest

Nobody likes to be in a tough financial situation.   However, if one learns from their mistakes then they can take this situation and learn from it, once they have turned it around.

It is so easy to get caught up in credit card debt that it becomes a real life changer.   Sometimes individuals find that at the end of the month they have some money left over, and are trying to decide whether they should invest, or should they pay down their debt first.

The most feasible answer is to pay down your debt first.   In most cases with any kind of debt there are interest charges.   They are the secret financial killers, and what you want to focus on first.

By really understanding how the interest on your credit cards work, it is going to be your first incentive for getting rid of this kind of debt.   The interest on credit cards is compound interest, which means it keeps growing.

Credit card companies charge interest on New Purchases starting from the transaction date until the amount of the New Purchase is paid in full.    The payment due date on a credit card is always at least 21 days from the Statement Date.   However interest still applies if you do not pay your balance in full.

Interest rate on a credit card is typically 19.99% and the real kicker is that most credit cards don’t calculate the interest on yearly basis, but in fact do so on a daily basis, which means you pay even more interest.

You are expected to pay at least something each month on your credit card debt.   If you don’t pay at least what is listed as the minimum payment, then you are in default of your credit card debt and this can get you into trouble.

Many people end up just making the minimum payments, but this really doesn’t do much good in reducing the amount owed.

What you may not realize is the minimum payment is usually about 2% of the balance that you owe.   In some cases over the period of a year you would be paying a slight amount against the principal you owe while the majority of this minimum payment is merely paying interest.   In other cases it may end up that you are not paying anything at all against the principal and your credit card debt is actually growing even though you are not using it to make any purchases.

Your first real plan of attack has got to be to pay more than the minimum payment.   Increase these payments as much as you can.   Pay attention to what the balance of your card is each month and focus on greatly reducing the principal.   This means that you have to know how much of your payment is going to interest and then really focus on trying to increase the amount that is going to pull down the principal owed.

Another area that you should really focus on when it comes to your finances, is your tax situation and what you can do to improve it. A quality and experienced accountant can help with this.

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Sam Seidman, CPA, CA, LPA
629 Sheppard Avenue West
Toronto, Ontario
M3H 2S3

Telephone: (416) 398-1700
Fax: (416) 398-6226

Chartered Professional Accountant, Chartered Accountant, Licensed Public Accountant

Email: sam@torontoaccountant.ca

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