© 2016 Shmoop University, Inc. All rights reserved.

Credit Card Interest

Here's where the rubber meets the road.

Credit card companies charge interest if you don't pay your credit card off every month.

Let's say that you go to prom and rack up $500 in charges for a prom dress, limo, and whatever else it is you need to have a great night. Perfect. Within the month, the credit card company sends you a bill listing all of your purchases and where you bought what. At this point, your parents may have a few questions. If you have 500 bucks, it's no problem. You just log into your account and pay it off using your bank account.

Paying It Later

But if you don't have $500 chilling in your bank account?

All you have to do is pay the minimum amount listed on your bill and the rest of the amount you owe will be carried over until the next month. So, if you can pay $100 of your $500, you'll have $400 left to pay some other month.

Here's the catch: you'll be charged interest on the $400. When you go to pay it in a month, it might be more like $425…or if you wait a few months…back up to $500. The more you put it off, the more interest you pay, which is basically like paying for something you can never use.

If you can, you should pay off your bill immediately; otherwise, you'll end up in a lot of debt.

You heard it here first.

Credit card companies are more than happy when you don't pay off your credit card every month. Why? It's how they make money. Since they're charging lots of interest, they stand to make a nice chunk of change from you if you keep charging but don't pay it all off.

Determining Credit Interest

Your credit interest will depend on a lot of things.

For starters, different banks will offer you different interest rates to try to get you to sign up for their card. It's called incentivizing.

Your credit history or credit risk will make the biggest impact on what you're charged. If you have other credit cards and always pay them on time, chances are you'll be able to get a better rate than Deadbeat Dan, who has gone through six credit cards and has had them all canceled for nonpayment after he took off to Tibet to "find himself."

Even if you plan on never, ever carrying a balance over, go for the card with the lowest rate (unless you enjoy paying more money for absolutely nothing). If you're ever in a financial emergency and have no option except the mob or your credit card, you won't pay as much—and you'll probably get to keep your kneecaps. You'll need those when you're old.

People who Shmooped this also Shmooped...