Understanding All The Costs Of Having A Credit Card

There are obviously many different reasons why somebody would want to apply for a credit card. A credit card can help you make purchases sooner than you would otherwise have the ability to. Additionally, many credit card companies have been offering increasingly attractive rewards programs in an effort to bring in new customers.

But with all of the good that a quality credit card can provide you, it is still very important to think about the costs associated with it before deciding to apply. Any two credit cards may be very different from each other and their cost differences are not something you should ever allow yourself to willingly overlook.

The Interest Rate
The most obvious cost of a credit card is the interest rate. Interest is a term that is used all throughout the financial world, but for the sake of applying for a credit card, interest refers to the cost of borrowing money.

Interest rates for credit cards are quoted as an Annual Percentage Rate (APR). This is the amount of money you will owe the credit card company for borrowing funds for 1 year.

Suppose a given card has a 12% APR. This means that each month, the amount of money that you owe the credit card company will increase by 1%. So if you owe the credit card company $100 in the status quo, you will then owe them $101 one month from now. The interest rate is often considered the most relevant cost of owning a credit card.

Compound Interest
Though it may seem like borrowing $100 on a credit card with 12% APR would mean that you will owe $112 one year from now, but this is actually not the case. Because your amount owed increases by 1% per month, the amount you owe will actually be a little bit more than this.

Compounding interest is a phrase that is used to describe the amount of interest being added to the interest costs you’ve already endured. In this specific example, you would actually owe $112.68 one year from now. Though the $0.68 might not seem like much of a big deal in this example, when you are borrowing larger amount of money, it can make difference.

The Annual Fee
Many credit card companies charge an annual fee to use their services. These fees vary tremendously between cards and will depend on the benefit programs being offered as well as the conditions associated with the cards themselves. Many people believe the benefits they get from using the card make the annual fees worth it.

Other Fees
There may be other fees associated with a credit card as well. These can include activation fees, transfer fees, upgrade fees, international fees, and several others. Because there are so many different types of credit cards currently available in Australia, it is important to compare before you commit. If it seems that the benefits of a card outweigh the costs associated with it, then you may want to consider applying.

Are you struggling with credit card debt?
If you are having difficulties paying down your credit card, there are numerous options available to break the cycle. Check out our section on debt relief as well as money skills to learn how to take control of debt.

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