APR. It doesn’t sound like something that feels like quicksand and can cost you thousands of dollars a year. Don’t say we didn’t warn ya.
APR is a magical way to take something ridiculously expensive and make it insanely expensive.
First: APR (annual percentage rate) is the annual interest rate on your loan or credit card, including all the fees and expenses that get tacked on.
What makes it so dangerous for the 73% of Americans who carry a credit card balance? It easily slips under the radar, like Noah Wyle at an Oscar party. Ignorance may be bliss, but you could end up paying DOUBLE for an item-and paying for nearly 10 years.
Take the pair of Jimmy Choos you’ve been drooling over. They’ll cost $900 after taxes. Whatever, it’s not like you need to pay for them right now. What are credit cards for, anyway?
So you pay the monthly minimum to keep your creditors happy. If your credit is in line with the national average, your APR is 14.9%. You’re shelling out fifteen bucks-pocket change. If you’ve made some mistakes, paid a few bills late, etc., you could be paying up to 28%. But it’s so easy, why worry about tomorrow’s creditors when today’s Choos need to get their groove on?
Reality check: Paying $15 a month, your new kicks will take nine years to pay off and cost a grand total of $1,639.26. That’s right, you’re handing a $739 windfall to your creditors.
If you keep adding to your $900 purchase, or have bad credit (and a 28% APR), you won’t see the light at the end of the tunnel until Justin Bieber is celebrating his grandkid’s birthday. That’ll be after the shoes are no longer in style-and you’ve paid $1,572 in interest.
How Do We Know All This? Cuz we’re brilliant. Also:
—Amy Kniss, eHow Money Editor
Photo credit: JimmyChoo.com