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Credit & Growth · session 2 of 6 · 30 min
The Cost of Carrying a Balance
- Compute what a carried balance costs in a month at a stated rate.
- Explain why the minimum payment is designed to keep you paying.
Interest is rent charged on borrowed money. Carry a Ⓛ1,000.00 balance on a card that charges 24% a year — the rate in this example; yours is printed in your card agreement — and the rent is about Ⓛ20.00 a month. Pay less than Ⓛ20.00 and the balance grows while you pay.
| Monthly payment | Months to zero | Total rent paid |
|---|---|---|
| Ⓛ25.00 (near minimum) | 62 | Ⓛ539.00 |
| Ⓛ50.00 | 25 | Ⓛ244.00 |
| Ⓛ100.00 | 11 | Ⓛ111.00 |
The near-minimum plan pays more than half the debt again in rent. The minimum is not advice — it is the smallest payment the lender will accept without penalty.
At this example's rate, a Ⓛ2,000.00 balance charges about 2% rent a month. What is one month's rent on that balance?
Work it out, then check
Two percent of Ⓛ2,000.00 is Ⓛ40.00 — charged this month, and again next month on whatever remains. Every Ⓛ you pay above the rent is the part that shrinks the debt.
This week
Find the yearly rate on your own card — it is in your agreement and on your statement. Work out one month's rent on your current balance. Decide what you want that number to be by this time next year.
Next in Credit & Growth: Rebuilding, One On-Time Month at a Time →