A recent billing received from a local retailer showed the interest rate at 27.24%APR*, we repeat, 27.24%APR*! This is at the high end, but rates of 18.00%APR*, 21.00%APR* and even 25.00%APR* are very common.
To put this in perspective, the annual interest cost on a balance of $10,000.00 x 27.24%APR*(interest rate) is $2,724.00. For a 30 day month the interest cost will be $2,724.00 / 365 days x 30 days = $223.89. The normal minimum payment is 3% of the balance, so on a balance of $10,000.00 the monthly payment is $300.00 per month. This retailer will take the $300.00 payment and then subtract the interest owed of $223.89 meaning only $76.11 will go towards the balance on the first payment. This account will take literally years to payoff at this rate!
Now, take this same example with the University Credit Union MasterCard having an Introductory rate of 0.00% for Six (6) Months and then 6.99%APR* for the Life of the Balance. The rate for the first 6 months is 0.00%APR* so every payment of $200.00 (Our minimum payment is 2% of the balance) comes off of outstanding balance. In 6 months that is $1,200.00 off the balance! Then the rate goes to 6.99%APR*. The balance is now $8,800.00 x 6.99%APR* an annual cost of $615.12 in interest. For the 30 day month the interest cost will be $615.12 / 365 x 30 days = $50.56. Now your $200.00 payment will be reduced by the interest of $50.56 and $149.44 will come off the balance on the seventh payment.
Compare the two (2) scenarios. In the second scenario there are 6 months of no interest. The payment is $100.00 less per month, but when the 6.99% rate kicks in the reduction to the balance in the second scenario is almost 2x the first scenario. It is a comparison of 27.24%APR to 6.99%APR. The interest rate on the retailer card is almost 4 times higher than the University Credit Union Rate!
*APR = Annual Percentage Rate