Ahh, the almighty credit card, luxury in plastic. Having a credit card makes so simple to just buy, buy and buy some more all without having to have the cash on you or the money in the bank. What a wonderful thing, right? Yes they are, right up until that boat load of credit card debt lands in your mailbox and it’s time to start paying it off.
To really understand how credit cards can put you into debt so quickly, it’s important to understand the flow of money as it relates to the credit card’s use.
The most important and obvious factor is the fact that the credit card is actually a line of credit that you can use to borrow money to make payments for whatever it is you’re making a payment for. Every time you use your credit card, it adds to the amount of debt you owe to the bank that supplies that particular credit card.
Now, it’s easy to see that if you use your credit card a lot that it is easy to rack up a lot of debt against and this is especially so if your card has a high credit limit. But, that’s not really where the credit card debt starts to pile up.
See, at the end of each billing period you are offered the choice to make a partial or full payment on the amount of money you have borrowed on your card. If you only make the minimum payment asked for, then the remaining balance is then beginning to incur interest charges. On credit cards, interest rates are some of the highest allowed by law.
As you can imagine if you make only minimum payments each month on your credit card and you continue to add to the amount you borrow, credit card debt can climb very fast. Especially considering that the interest charges themselves are also added the borrowed debt you have against your credit card. This means, that interest begins to accrue on that portion as well. Yes, interest building interest.
But, that’s not all. If you fail to make a payment or make your payment late, then you will be subject to high late fees that increase the amount of your borrowed debt which in turn increases the amount they charge interest on.
Again, it’s quite easy to imagine that if you continually make partial payments or late payments that your credit card debt can quickly spin out of control.