What is Interest?

Interest is the cost of borrowing money. When you carry a balance on your credit card past the due date, the bank charges interest based on your outstanding balance and the interest rate.

Key Factors Affecting Interest

• Outstanding Balance: The amount you owe.
• Annual Interest Rate (APR): The percentage charged yearly for borrowing.
• Time Period: The longer you carry a balance, the more interest you accumulate.

Example

Current Balance: $100
Annual Interest Rate (%): 8%
Years to Pay Off: 2 years

Calculation:

1. $100 x 8% x 2 months = $16.00 interest
2. $100 + $16
3. End Balance: $116

Reflection Questions:

• How does increasing the payment period affect the total interest?
• What happens if you only make minimum payments?

Key Takeaways:

• The longer you carry a balance, the more interest you’ll pay.
• Reducing your balance quickly minimizes interest costs.
• Understanding interest helps you make better payment decisions.