1His life
Jordan needs a car to get to work. He borrows $20,000, to pay back over five years. He also has $3,000 on a credit card from last winter.
Two loans, two very different stories.
2How it works
Interest is the price of borrowing money. The lender lets you use their money now; you pay it back later, plus extra. That extra is the interest. It's usually shown as a yearly rate called the APR (annual percentage rate), which for loans also counts certain fees.
Your credit score helps set your price. A credit score is a number, based on your borrowing history, that lenders use to judge how likely you are to repay. Lenders usually offer lower rates to people with higher scores, which come largely from a history of paying on time. On Jordan's $20,000 car loan over five years:
| Interest rate | Monthly payment | Total interest paid |
|---|---|---|
| 7% | about $396 | about $3,761 |
| 9% | about $415 | about $4,910 |
Two percentage points cost him about $1,150 more. (Example numbers, rounded.)
Compound interest can work against you. On a credit card, interest you don't pay off gets added to what you owe, and from then on you pay interest on that too. That's compound interest. If Jordan pays $100 a month on his $3,000 card at 22%, it takes him about 44 months to clear it, and he pays about $1,400 in interest. (Example numbers, rounded.)
Some rates are fixed, some move. Jordan's car loan has a fixed rate: it never changes. Most general-purpose credit cards have a variable rate that moves with the prime rate. The prime rate is a benchmark banks use to price many loans; it usually sits 3 percentage points above the Fed's target rate, so it moves when the Fed moves.
3It really happened
+0.25 pt
The Fed raised its key interest rate by a quarter of a percentage point.
See it in Historical Data →Prime 7%
That same day, major US banks, including JPMorgan, KeyCorp and BNY, announced they were raising their prime rate to 7% from 6.75%, effective the next day, according to Reuters. Many credit card rates are tied to prime.
Above 20%
Card rates were already high: Federal Reserve data show the average rate on card accounts charged interest has been above 20% since 2023.
Worth knowing
That's how a decision in Washington can show up on a credit card statement, often within a billing cycle or two, though some cards take a few months.
← Chapter 2: Her paycheck sits in the bankAll chapters
Sources for this chapter (7)
Maya and Jordan are fictional; every number in "It really happened" is real and sourced. We explain how it works. What you do with it is your call. Commentary and education only. Not financial advice.