Credit Card Debt

If there's one thing to know about credit card companies and what they want, they want you to avoid paying. The companies cannot charge any interest if you pay them back and owe nothing on your cards. Thus, they do not make a profit. However, pay just a little bit each month, and they have a steady income based on the interest of what you owe.

Revolving Debt-Different From Mortgage Debt

The majority of credit cards employ a method of what's called '"revolving" debt, just about all except American Express and Diners Club cards, which must still be paid off in full every month.

However, for the rest of the credit cards out there, the system of r revolving debt means that you can pay off as much as you like each month. Or, you can pay the minimum and run up as much debt as you want each month (up to the maximum of the card, of course).

Unlike a fixed-term loan (a 20-year mortgage, for example), the size of your payments and how long you'll have to pay them are variable. Each new purchase can dramatically extend your time to get your balance back down to $0. This is why credit cards are so profitable for the companies that offer them and so expensive for you.

A Dollar Today Is Less in a Year

Though this is rarely realized, using a credit card makes your money worth less than it would normally. This is why credit cards seem so much harder to pay back – if you borrow a dollar from a credit card at 15% interest, sit on it for five years, and then give it back, you still owe a dollar!

The dollar you gave them back only repaid the interest built over those five years. This is critical advice to understand about credit cards since it means that the last thing you should do is leave this debt to be paid off later. 

A Helpful Mind Trick

Since at some point, you will have to pay off the interest on your credit card debt, use this simple spending perspective to understand the value of avoiding debt. Start by adding your cards' yearly interest rates to everything you buy when considering the price.

Then, decide if a thing usually worth $100 to you is worth $115 since there is 15% interest added. Similarly, take off the interest you get on your savings as a mental discount. Thus, you'll be able to value the advantages of using savings instead of debt more quickly.

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