Q: How Much Are Credit Cards Really Costing You?

A: Credit cards could be the worst investment you have going these days. According to a SmartMoney.com poll, about 50 percent of readers are using cards that charge more than 12 percent interest on outstanding balances. And 17.5 percent are paying 18 percent or more. Are interest and hidden fees bleeding you dry?

A low interest rate — key to controlling your credit card debt
To fully understand the impact of a high versus a low interest rate, let’s look at an example in which a person charges $1,000 on a card. After this purchase they make no further charges and pay only the minimum each month until the charge is paid off.

High interest-rate card: 23.99 percent

The minimum monthly payment will start at $51 and slowly work its way down to $10.
The cardholder will make 77 payments over six years and five months.
The cardholder will pay a total of $573.59 in interest.

Lower interest-rate card: 9.9 percent, fixed-rate

The minimum monthly payment will start at $50.41 and go down to $10.
The card carrier will make 17 fewer payments, finishing in five years.
The cardholder will pay a total of $176 in interest — saving almost $400!

Helpful Tips:

Don't apply for more than one credit card at a time.
Avoid charging disposable items on your credit card.
If your card has a high interest rate, transfer your balance to a lower rate card; but make sure the low rate applies to balance transfers as well as any new charges.
If you pay your monthly balance in full, get a card with a grace period to ensure that you are not being charged interest on new purchases from the day they are posted.

Hidden fees — know what to avoid
Credit card issuers are notorious for hidden fees. Therefore, it’s important that you read the fee disclosure to understand what fees are associated with a particular card. A few red flag fees to look for include:

Annual fees — Some credit card issuers charge a yearly fee simply to be a cardholder. Avoid this fee. Many good credit cards don’t charge an annual fee.
Closure fees — Some credit card issuers charge cardholders as much as $50 to close an account. Find out about this fee before you sign up.
Late fees — Late fees are charged if a payment is one or more days late. In addition to late fees, many card issuers also drastically raise interest rates after a certain number of late payments. Find out whether a payment is considered posted on its postmarked date or on the date the bank or credit card company gets it posted.

Understanding how much YOUR credit card is costing you
Interest rates and any fees related to the use of your credit card could be costing you more than you can imagine, so take charge! Review your last credit card statement, and see what interest rate you’re being charged and what fees are being included. Depending on what you discover, it might be time to shop around for a new card.

In over your head with credit card debt? Visit Debt Freedom Tips for help getting back in balance!

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