So you that big, bold number on your credit card bill that says you only need to pay around 1% of your total card balance?You may be wondering how they earn money from that, and why they’d want you to pay that. Well, this post will explain that.
First of all, your APR only kicks in when you don’t pay off your full credit card balance at the end of the month. So when you only pay your minimum, you start paying interest on the remaining balance. So, the less you pay each month, the more the credit card issuer earns in the long run, and the more you lose.
Your credit card issuer actually wants you to pay just the minimum because they can earn thousands of dollars from interest during the many years it takes you to pay off your balance. What about 0% APR cards? Well, no credit card has a 0% APR forever, it’s just temporary, so once you rack up $20,000 because you only payed the minimum because you thought you didn’t pay interest, the instant that period is over, you’re going to pay thousands of dollars in interest. Credit card companies can afford the short term loss to get that much money in the future.
In fact, if you continue to pay off your full credit card balance each month, eventually your credit card issuer will begin to raise your credit limit. Their hope is that once your credit limit gets high enough, you’ll spend more than you have, causing you to not pay off your bill in full, earning them interest money. Not that they need that much money from interest, to be honest. Each time you swipe your card, the credit card issuer usually gets a percent of that money; that’s how you can get cash back without your issuer going bankrupt.
Overall, the most important credit card lesson to learn is:
Never buy more than you can afford and always pay off your full balance every month!