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Your credit card interest rate doesn’t matter

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Ok, I’ve gotten some heat for this idea, but I don’t care. I’m tired of hearing people bragging about their credit card’s low interest rate. Here’s why I don’t care whether it’s 5% or 80%.

What does “interest rate” mean on a credit card?
A credit card basically gives you a short loan for the month. If you pay it off completely during that monthly period, you don’t pay for the loan–it’s an interest-free loan.

But if you don’t pay off the entire balance–let’s say you spend $1,000 on your credit card but can only pay off $500 that month–then you have a balance on your card. That’s what interest is charged on; typically, it’s somewhere around 20%. In this case, you’d be charged $8.33 that month ($500 balance * 20% interest) / (12 months).

Why I don’t care if my CC interest rate is 5% or 80%
It’s simple: I never carry a balance–and neither should you. If can’t pay it off at the end of the month, I don’t buy it.

I’m not going to belabor the point because, if you’re reading this, you clearly care about your money. But you would be shocked how many people I talk to that charge purchases without knowing how much they’ll actually pay for it. So let’s take a look…

Let’s say you have a $10,000 balance on your credit card and you pay the minimum amount, which is around $250 every month. How much will it actually cost you? The answer is shocking. Get ready!

If you only paid the minimum on your $10,000 balance, it would take you 452 months (over 8 years!) and cost you over $19,000–in interest alone. In other words, you’d pay around $30,000 for a $10,000 balance.

This is why credit card companies are so incredibly profitable, especially with young people who don’t know any better.

The point is pretty obvious. Don’t carry a balance (if you do, pay it off as quickly as you can). Pay the maximum every time. If you can’t pay off a purchase by the end of the month, don’t buy it. “But Ramit,” people say, “what about homes and college and cars? How can I pay that off in one month?” Yes, true, those very expensive purchases necessitate some kind of longer-term loan. But not with your credit card.

So when I hear people excited about their introductory interest rate (“It’s 0% for 6 months!!”), I’m not really impressed. As long as you pay your balance in full every month, your CC interest rate is meaningless.

References

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21 Comments on "Your credit card interest rate doesn’t matter"

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jrk
jrk
11 years 3 months ago
All I ever think when I get these offers in the mail is: WHY WOULD YOU EVER CARRY A BALANCE ON YOUR CREDIT CARD!? (Thank you for yelling on my behalf.) I don’t even know the interest rates on any of the credit cards I’ve ever held. The only time it is at all relevant is when you play games with a super-low (0%) interest rate on a very high-limit card. Some people with balls and money to back them up use these offers to invest aggressively over 6-12 month windows. Even if you only do something super-low-risk so you… Read more »
Rachel Lane
11 years 3 months ago
I admire your discipline and agree with your advice. However…. …my cynicism provokes me to say (perhaps controversially) that the fact you are a student at Stanford gives you more flexibility in managing your finances than other students. I have recently paid of an outstanding balance of two years and just feel such complete relief. There have been times when I have had to suddenly put large costs on my card – such as car insurance changes, travel costs, suit for graduation interviews etc. Sometimes the money just isn’t there when it has to be! You don’t have to have… Read more »
Roque Curiel
Roque Curiel
11 years 3 months ago
You’re correct in saying that interest rates do not matter if you pay off the ballance every month but check your statement on how interst is calculated. It is not calculated on the balance remaining after your payment. My name is Roque Curiel, I used to teach personal financial management at the university level and I am the author of the textbook, “Money Well Spent.” I admire your mission and I think I understand the point of chossing the title you have for your blog. I teach people to achieve financial independence, which is a different state of mind than… Read more »
Ramit
11 years 2 months ago

Roque, you’re right about the interest accruing on each purchase the month after you have a running balance. Thanks for pointing that out.

Jerry Kindall
11 years 2 months ago

Some credit cards use the nefarious two-cycle daily balance, which keeps you paying interest on half of what you’ve paid off for a FULL MONTH after you make your payment. Watch out for this trap!

Vincent Lauria
11 years 2 months ago

Well, I don’t agree with you 100% on not carrying a balance, that’s a lifestyle choice.

On a side note, this is what I use my 0% CC’s for is this:

Get one that gives you a year at 0%. Then ‘pay-off’ another CC. When I say pay-off, I mean pay it to another card with no balance. Then have that other card cut you a refund check. Then use that refund check to put it into an investment, like INGdirect.com. Then make ~$100 month off of interest alone, for doing VERY LITTLE.

Roque Curiel
11 years 2 months ago
Hi Roque, What a small world !, My name is Roque Curiel also. We share many financial credos. I refuse to carry a balance on our two credit cards and actually get 1% cash back on our Golden 1 Visa card. I bought your book from Lulu.com but it looks like the printing was not complete, I did not get the seven steps to financial freedom, the book ended abruptly. My wife was surprised when she read the book, she thought that most of the ideas related to my way of thinking, except for the deep quotes. Anyway, we are… Read more »
Marla
11 years 2 months ago
Ah, but if your credit card offers a fixed rate balance transfer that is lower than the interest rate of your current student, business or car loan, and you don’t use that card for anything else, it can be quite economically smart to carry the balance there rather than with the higher rate lender. For example, we took out a small business loan which I transferred to a credit card at 2.9% fixed. I don’t use the card at all. Just make the biggest payments we can every month. We did the same thing with our car loan and the… Read more »
Marnell Bookins
Marnell Bookins
10 years 1 month ago

Run these numbers, pay 50% of a credit card balance each month for 6 months or less, calculate the actual real rate of interest.

prlinkbiz
10 years 1 month ago

I carry a 30% balance on my cc. This is a strategy I am using for building credit. It is a low limit card, that I use only for already budgeted monthly expenses. I do not care what the interest rate is, because the credit it is building for me will allow me to make many times that amount. Credit is like a muscle- use it or lose it. Use it wisely, and it can be an invaluable tool to financial freedom.

Nelson
5 months 18 days ago

Actually you don’t need to carry a credit to build your credit. You are wrong about that. The other guy commenting, Roque. I can’t believe you wrote a book on financial freedom and you can’t even spell balance. Go figure…

Ramit Sethi
10 years 1 month ago

Wait, why 30%? Have you heard of your debt-to-credit ratio? Lower is better for your credit score.

john
john
10 years 1 month ago

prlinkbiz, you’re nuts! i started out with a low credit limit on my first card (I also got it to establish credit), and within 6 months of paying the whole thing off every time, the company raised the credit limit from 500 to 2000. I’m sure they would raise it more if I needed it.

Jonathan van Clute
10 years 1 month ago
Forgive me, but in my opinion this post and the sentiments expressed in it, are dead wrong. One thing is absolutely right however – your credit card interest rates DON’T matter, but not at all for the reasons expressed. They don’t matter because if you use it like the very powerful tool it is, your credit card can make you lots and lots of money. If you borrow say $3000 on a credit card at 2.9%, and use that money as the down payment on a rental property that costs $30,000 and pays you $400 per month in rent, you… Read more »
Laura
8 years 9 months ago

I have a credit card with 18.99%. I don’t mind too much as I get cash back and I pay the balance in full. Thanks for posting an article that has common sense.

Basiex
Basiex
8 years 9 months ago

The 3% transaction fee wipes out any profit one can make on a low interest card.
Basiex

Olivia
Olivia
8 years 1 month ago
Well, you should know if you have great self control it is also wonderful to use balance transfer offers for car loans. I have really good credit and do get the “great low rates on cards” so I am one of those that also gets the 18 month 0% offers or 1.9% offers for 12mths. Most recently I got an offer of 0% for 12 months. In the past 10 years I have bought two cars totaling $45,000 and used balance transfer offers. I have paid less than $400 to 500 to do this, total for these cars including interest… Read more »
Bala
Bala
7 years 1 month ago

hi,
what a junk article, do you think that you have conveyed something Great.if you think so, then there is something wrong with your thinking process itself. Inwhich way the article and the topic heading co-relating .

Rossie
Rossie
11 months 15 days ago
I am a little confuse on how you came up with those numbers! If you have a $10,000 dollars debt and only pay $250.00 it will take you 8 years to pay off what? First off you definitively left out the interest rate which is what the banks used to get the daily periodic rate. I understand you did this to prove your point, but in my opinion it is not a very educated one. I calculated how long it will take me to pay a 10,000 debt on a credit card with my current interest rate and that came… Read more »
Xbb
Xbb
2 months 17 days ago

Helpful blog.. such a relief

Elizabeth forbes
Elizabeth forbes
1 month 10 days ago
My name is Elizabeth forbes from united states. I want to thank Mr Johnson who helped me to get a loan. For the past three months, I have been searching for a loan to settle my debts, everyone I met scammed and took my money until I met Mr Johnson Snowberger. He was able to give me a loan of $15,000US Dollars. He can also help you. He has also helped some other colleagues of mine. If you need any financial help, kindly contact his company through email: johnsonsnowberger@outlook.com I believe he can help you. Contact him to get help… Read more »
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