Credit Cards

Well, that's one of the problems! Bank card customers don't see the money leaving their wallet or purse, so it doesn't feel like real spending. Buying the latest electronic gadget might make you think twice if you had to count out $500 in cash and hand it to the clerk! Customers don't see the money leave their wallet, but it is accumulating as debt in their credit account. Furthermore, monthly fees called interest rates make that debt grow at 10%, 20%, or even 30% or more each month. That's right: if you don't pay off your full account balance each month, the amount you owe increases, even if you don't make any more purchases! The month after that, you have to pay interest on the original amount, plus the amount of interest from the previous month.

As a very simplified example, assume you make a $100 purchase on your bank card at 20% interest. Here's what your card balance might look like if (for some reason) no payments were made for 5 years:

Year 1: $100 (original purchase amount)

Year 2: $100 + 20% interest on $100 = $120

Year 3: $120 + 20% interest on $120 = $144

Year 4: $144 + 20% interest on $144 = $173

Year 5: $173 + 20% interest on $173 = $208

Within 5 years, the amount you owe has DOUBLED! This is a very simplistic example, and things are much more complex in the real credit banking world, but you can see how quickly card debt grows.

On the other hand, if you had invested $100 for five years at 20% interest, you would have doubled your money. It also shows the importance of paying more than the minimum payment each month. The more you reduce the amount owed, the less your card balance increases due to interest. If you can't pay on time, then the situation gets worse rapidly. There may be extra fees added to the amount you already owe, and your card's interest rate may be increase to the maximum (30% or more).

It makes no sense for the bank to charge you more and more when it is obvious that you cannot pay, but that's how it seems to work. Now that you are properly shocked about the seriousness of paying with plastic, consider starting with a bank card that has a very low credit limit.

Make a few small purchases each month, and pay them off promptly at the end of the month. Not only does this help your credit score, but it gets you in the right financial habits for using a credit card responsibly.