The Real Cost of Credit Card Purchases

Have you ever wondered what purchases on credit cards are actually costing you? If you’re like many credit consumers, you may think only of the original cost of the merchandise or services you charge on your cards, but by carrying a balance from month to month, the interest and fees assessed to your account can add substantially to the cost of the items or services you originally purchased.

Credit cards with grace periods

One way to avoid paying more than the original price on a credit card purchase is to use a card that offers a grace period. This is a “free period” that allows you to pay your balance in full by the due date each month without charging any interest on your account. If you carry a credit card for convenience and pay the full balance on each statement, you’ll save money on interest if your card offers a grace period.

Cash advances – how much do they cost?

Many credit cards feature the convenient option of a "cash advance," usually obtained by accessing your credit card reserve through an ATM or by using special checks the credit card company sends you. On the surface, cash advances may seem like any other transaction on your account, but they can end up costing considerably more. Interest rates on cash advances are usually significantly higher than those on purchases. Also, cardholders need to be aware that the cash advance balance pays off only after you have paid off the entire balance on all of your regular purchases. So, unless you pay your card in full every month, cash advances may greatly increase the interest you pay on your card.

Perks may lower the real cost of credit card purchases

If you have a credit card that offers special perks such as frequent flyer miles, cash back on purchases, accrual of points toward the purchase of merchandise, or any other special feature that saves you money, you should factor this into the actual cost of your credit card. For example, if you earn and use frequent flyer miles, the amount you save on airfare is very real. Again, exchanging credit card points for merchandise you had already planned on purchasing is another tangible money saving feature.

When calculating the true cost of the credit cards you carry, consider both the positive and negative features. There are different kinds of value, and some credit card perks can help to enhance your lifestyle.