Lesson: Understanding Credit Cards & Interest
1. What is a credit card?
A credit card allows you to borrow money from a bank to make purchases.
● You must pay the money back
● If you don't pay the full balance, the bank charges interest
● Credit cards have a credit limit (the maximum amount you can borrow)
Example:
If your credit limit is $2,000, you cannot spend more than that amount.
2. Key Credit Card Terms
● Balance – The amount you owe.
● Credit Limit – Maximum amount you can borrow.
● Minimum Payment – The smallest amount you must pay each month.
● Interest Rate (APR) – The percentage the bank charges for borrowing.
● Grace Period – The time
● you have to pay before interest starts.
Most credit cards have interest rates around 19%--25%.
3. How Interests Work
Interest is the cost of borrowing money.
Simple examples:
You owe $1,000
Interest rate = 20%
Interest for one year:
1000x0.20= 200
After one year, you would owe:
$1,200
But credit cards usually calculate interest monthly, which makes it grow faster.
4. The Minimum Payment Trap
If you only pay the minimum payment:
● Your debt lasts longer
● You pay much more in interest
● It can take years to pay off small amounts
Example:
Example:
$1,000 debt at 20% interest
If you only pay $25/month →
You could pay hundreds extra in interest.
1. What is a credit card?
A credit card allows you to borrow money from a bank to make purchases.
● You must pay the money back
● If you don't pay the full balance, the bank charges interest
● Credit cards have a credit limit (the maximum amount you can borrow)
Example:
If your credit limit is $2,000, you cannot spend more than that amount.
2. Key Credit Card Terms
● Balance – The amount you owe.
● Credit Limit – Maximum amount you can borrow.
● Minimum Payment – The smallest amount you must pay each month.
● Interest Rate (APR) – The percentage the bank charges for borrowing.
● Grace Period – The time
● you have to pay before interest starts.
Most credit cards have interest rates around 19%--25%.
3. How Interests Work
Interest is the cost of borrowing money.
Simple examples:
You owe $1,000
Interest rate = 20%
Interest for one year:
1000x0.20= 200
After one year, you would owe:
$1,200
But credit cards usually calculate interest monthly, which makes it grow faster.
4. The Minimum Payment Trap
If you only pay the minimum payment:
● Your debt lasts longer
● You pay much more in interest
● It can take years to pay off small amounts
Example:
Example:
$1,000 debt at 20% interest
If you only pay $25/month →
You could pay hundreds extra in interest.
