Take a look at this example to find out why it’s important to pay on time: Edwin has a new credit card with a 13.99% APR and a $500 credit limit. He spends a total of $900 over three months. He pays off a total of $600.
Look at these two scenarios. In both scenarios, Edwin spends $900 on his card and pays off $600. In Scenario 1, at the end of March, he owes $313. In Scenario 2, he owes $416. Depending on when Edwin pays, he can owe $100 more on his credit card after just three months just by paying late!
Scenario One: Paying on Time| | January | February | March | April |
|---|
| Ending Balance | $300 | $453 | $458 | $313 |
|---|
| Purchases | $300 | $300 | $300 | - |
|---|
| Payments | - | $(150) | $(300) | $(150) |
|---|
| Late Fees | - | - | - | - |
|---|
| Overlimit Fee | - | - | - | - |
|---|
| Interest Charges | - | $3.22 | $4.53 | $4.94 |
|---|
APRs| Standard | | 13.99% |
|---|
| Penalty | | 24.99% |
|---|
Scenario Two: Late Payments| | January | February | March | April |
|---|
| Ending Balance | $300 | $670 | $707 | $415 |
|---|
| Purchases | $300 | $300 | $300 | - |
|---|
| Payments | - | - | $(300) | $(300) |
|---|
| Late Fees | - | $29 | $29 | - |
|---|
| Overlimit Fee | - | $35 | - | - |
|---|
| Interest Charges | - | $6.34 | $7.84 | $7.68 |
|---|
Scenarios assume $29 late fee, $35 over-the-limit fee, average daily balance billing, and a $500 credit limit.
What happens in Scenario 2?
Edwin has paid just as much money. But he missed a payment in January, his February payment arrived late, and he paid on time in March. Because of this, although he’s paid just as much money, he owes $415 – more than $100 more than if he’d paid on time.
This happened because:
- In January he missed a payment, so he got charged a $29 late fee.
- In February his balance was more than $600 but his credit limit was $500. He got charged a $35 over-the-limit fee.
- In February his payment arrived late so he got a late fee of $29.
- Because he missed or was late on two payments, and because he went over the limit on his account, his interest rate increased from 13.99% to 24.99%.
- Greater fees and more interest meant $100 more debt after just three months.
Paying on time made a big different for Edwin, and it can for you too.
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