How Interest Rates Affect What You Pay for Charged Items

When you cannot afford to purchase merchandise that you want to have now, you can charge it to a credit card and pay it off over time, with interest. The effect of the interest rate on the amount you pay depends not only on the interest rate itself, but also on how quickly you pay off the balance and what special promotions your credit card has.

The higher the interest rate, the more you will pay for merchandise you charge to that credit card. For example, if your interest rate is only 10 percent annually, you pay 0.833 percent interest each month on the remaining balance from the purchase. If, on the other hand, your interest rate is 20 percent annually, you will pay 1.67 percent interest per month, which is twice as much.

The amount of time you carry the balance on your credit card also affects the amount you pay. If you pay for the merchandise quickly, you will pay much less interest than if you drag out the payments by paying only the minimum each month. For example, say you charge a $600 television to your credit card. If the credit card company charges 15 percent interest and you pay $100 per month, you will owe only $27.70 in interest and be done paying it off within six months. If, on the other hand, you pay only $20 per month, you will pay $156.71 in interest and take over three years to pay off the purchase.

Some credit cards have low introductory interest rates that can save you money on your purchases. For example, many stores offer credit cards that you can only use at its store. If this card has an offer of zero percent interest for six months, you can sign up for the credit card to make the purchase, pay it off in full over the next six months and not owe any interest.

With most types of credit cards, if you pay your credit card bill in full every month by the due date, you never pay interest on your purchases. Therefore, if you paid your bill in full for the month before you charged the merchandise and you pay the bill with the merchandise in full by the due date, you will not owe any interest on the purchase. This is the best way to use a credit card because it gives you some time to pay the bill without costing you anything.