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Faking Adulthood | Interest Rates

Faking Adulthood | Interest Rates

Along with being “an adult” comes an expectation that you suddenly, magically  know how to do things. That you understand how your finances work—or rather, should work. If you took an economics class somewhere along your path to wherever you are today or excelled in math, congrats. If you didn’t, here’s a basic breakdown of one of the most common concepts that can bite you in the ass: interest rates.

Interest rates are what creditors charge you over time for the money you essentially borrowed from them. Interest rates of 15% were average at the start of this year. Although that doesn’t seem like a huge number, over time you can end up paying hundreds or thousands of extra dollars if you’re not careful.

Each month your credit card bill shows your minimum payment due, which is usually just 2-4% of what you actually owe. For example, if you’ve racked up a debt of $8,000 on a credit card from your summer trip to Spain, your shiny new car, or boatloads of brewing supplies, you’re looking at a minimum monthly payment of $160.

However, once you pay that it doesn’t mean that next month you will only owe $7,840. Oh no. Part of that $160 goes towards your principal (the money you owe) and part goes to interest. Any of this sound familiar from a high school math class? To determine exactly how much of your debt you’ve paid off, take your interest rate—we’ll use 15% here— and divide it by 12 months. Then multiply by your debt. (.15/12) x 8,000= 100 That means you just paid $100 in interest, and your debt will only be reduced by $60 that month.

If you have some money saved up for a rainy day, it might be prudent to use some of it to pay off some of your debt, so you don’t end up paying more in interest in the long run. Not exactly a fun way to use that money, but let’s face it, the credit card company is going to get it from you one way or another. Might as well cut your losses. If math isn’t your thing, check out this credit card calculator.

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