What’s you answer to the following multiple choice question:
Larry has a MasterCard with a 24% interest rate. Over the course of a year, his average balance is $10,000, however he pays the entire balance every month when he gets the bill. The total interest he pays during the year is most likely approximately:
- $0
- $1,200
- $2,400
- $4,800
The question comes from a financial literacy quiz published by Bad Money Advice, and it underscores an important point about the interest rates charged by credit card companies–if you pay off your card in full each month, the interest rate is irrelevant to you, because you won’t pay any interest.
This is an important point to keep in mind when considering a low interest credit card. While you can find cards that charge less than say 10%, if you pay off your card each month anyway, you’ll never pay ANY interest. Of course, all things being equal, you’d rather have a lower interest rate card “just in case.” But keep in mind that lower interest rate cards often come with fewer other features, like cash rebates or 0% introductory rates on balance transfers or purchases.
And as for the quiz at Bad Money Advice, it is well worth a few minutes of your time (and you can get the answer to the question above if it has you stumped).
