Sundaram already has a credit card with no yearly fee. But when he opened his mail the other day, he saw a great offer for a lower rate card - for a fee. He wonders if it could help him save money, because he doesn't always pay off his monthly balance. Here are his two choices:
- a regular card with an interest rate of 19% and no annual fee
- a lower rate card with an interest rate of 12% and an annual fee of $120.
Sundaram compares the total costs of the cards, including fees and interest, for two different outstanding balances for a year: $1,000.00 and $2,000.00. This example assumes the interest is calculated monthly.
|
Regular-rate card (19% interest) |
| Balance owing |
Interest |
Annual fee |
Annual cost
(not including payment of balance) |
| $1,000.00 |
$207.45 |
$0 |
$207.45 |
| $2,000.00 |
$414.90 |
$0 |
$414.90 |
|
Lower rate card (12% interest) |
| Balance owing |
Interest |
Annual fee |
Annual cost
(not including payment of balance) |
| $1,000.00 |
$126.83 |
$120.00 |
$246.83 |
| $2,000.00 |
$253.65 |
$120.00 |
$373.65 |
What Sundaram learns: If he carries a balance of $1000.00, the regular rate card is less costly because it has no annual fee. If he borrows more each year, the interest rate will factor in more. With a balance of $2,000 over a year, Sundaram would save $20 using the lower rate card. He should still aim to pay off his debt as fast as possible to reduce the interest due every month.