apr interest rate explanation illustration

What is APR: Didn’t Understand It and Paid $1,847 in Interest

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Disclaimer: This article is for educational purposes only and does not constitute financial advice. Investing involves risk, including the potential loss of principal.

I got my first credit card at age 22 and had absolutely no idea what “24.99% APR” meant. I didn’t care either; I just wanted the card so I could shop and build credit history. Interest rates seemed like something I would worry about later.

Spoiler alert: “later” came quickly, and it turned out to be very expensive.
What I Thought About APR (I Was Wrong)

What I Thought APR Meant (I was Wrong)

Here is what I thought 24.99% APR meant at my age: “$100 spent, $124.99 owed. After that, I’ll just pay it off, and it’s no big deal.” That is not how it works AT ALL. APR is Annual Percentage Rate, meaning that if I had a balance, the interest I would pay per year would be subject to APR. This is where I got confused and where it started to screw me. I’m still confused.

How I Racked Up $1847 in Interest (The Dumb Way)

In my first month, I had to pay for an $800 laptop on my credit card. All I did was make the minimum payment of $25.

I thought, “Awesome, I’ll do this over time, no problem.”

In the second month, my balance was $817. I thought… hold up, why is this $17 more?

That was interesting. The 24.99% APR gave me an interest rate that was 2.08% more after a month. So I was charged $17 more.

I still didn’t get it. I just kept doing the minimum payments.

For months 3-18, I kept using the card (groceries, gas, random things). I kept doing minimum payments ($25-45), which changed with the balance.

My balance was $800, then $1,200, then $1,580, and then it went over $2,000.

In month 19, I actually went through my statements and added up the interest, which was $1,847.

I paid interest worth $2,000 on things that cost at most $3,500. I was pissed and finally learnt how this works.

What does APR mean?

It is the yearly rate at which you are charged interest; however, it is divided and charged monthly.

Here is an example I finally understood.

If an APR is 24.99%, the monthly interest rate is:

  • 24.99/12 = 2.08%
  • If your credit card has a balance of $1000, the interest charged is roughly $20.80.
  • After the month, the new balance is $1020.
  • The following month, you’d be charged interest on $1020.

This is an example of compound interest. This is how credit card debt grows exponentially.

credit card interest calculator
Calculating interest charges on credit cards

The Minimum Payment Trap (How They Get You)

If credit card companies want you to make minimum payments, it is because if a balance of 2,000 dollars is owed and the APR is 24.99%, it takes 6.5 years to fully pay.

  • If a monthly payment of $50 is made, $1932 in interest has to be paid, which totals $3,932.
  • If $200 is paid monthly, it only takes 12 months to fully pay, and only $272 in interest is paid.

A difference of $1,660 in interest is paid based on how much you pay monthly. As soon as I figured this out, I halted my minimum payments.

How I Fixed It (11 Months)

Step 1: Stopped using the card

Did I cut it up? Nope. I just tucked it in a drawer instead of my wallet. If using my debit card meant spending, then it meant I couldn’t buy it.

Step 2: I paid as much as I possibly could each month

I stopped paying the $45 minimum payment on my credit card and instead contributed between $180 and $250 each month, depending on how much money I had left after covering my bills. In some months, I was only able to pay as little as $120, but I consistently paid more than the minimum every single month.

Step 3: I used extra funds to reduce my credit card balance. All income from side hustles, birthday money, and tax refunds went directly toward paying off the credit card.

Final payoff date: September 2024. I paid $0, up from $2,247 in my balance, and paid it off in 11 months.

Total interest paid during the payoff: $318 (much better than the $150+ that I was paying each month).

Things I Wish I Had Known Before Getting a Credit Card

credit card interest charges concept

Promotional bonuses and rewards are less significant than the card’s annual percentage rate (APR). I received a cashback card offering 2% rewards, but had a 24.99% APR. If you maintain a balance, the rewards are irrelevant.

Offers with 0% APR are valuable only if you settle them on time. Certain cards provide a 0% APR for periods ranging from 12 to 18 months. This is only beneficial if you pay off the whole thing, but if you don’t, some cards will backdate the interest, and you will have to pay the full APR. Check the fine print.

The trap is the minimum payment. It keeps you in debt for as long as possible, and in the meantime, you pay interest.

Even good APRs are expensive. 18% APR cards are pretty bad, and friends rely on them, and 24.99% is still bad with 1.5% interest a month. Don’t have debt, and if you do, don’t take the minimum.

Pay as much as possible. If you pay the full amount, that’s best, but if you have to leave a balance, don’t just do the minimum. Paying a lot more helps a lot. Even $50 more helps.

Understanding APR helps prevent hidden costs that can undermine a frugal lifestyle.

Where I’m At Now

I’ve still got that credit card (closing it would impact my credit score). But it’s different now:

  • I only buy things that I can pay off right away
  • I pay off the full balance every month
  • I’ll pay no interest until October 2024

My credit score skyrocketed from 584 to 696 in 8 months (that story is for another time), and a huge factor in this is the fact that I stopped the interest bleeding and paid down my balance.

When the credit card arrived, I used it to purchase things, and I thought APR was boring and uninteresting. Now I understand that it is literally the cost of borrowing money, and I ignored it for 2 years, costing me almost $2,000.

Don’t be like my past self, understand this stuff before you swipe that card. Interest rates play a major role in how quickly debt can grow if left unmanaged.

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