Credit Card Debt

If there's one thing to know about credit card companies and what they want, know this - they don't want you to pay.  If you pay them back and don't owe anything on your cards, then the companies cannot charge any interest.  Thus, they do not make a profit. However, pay just a little bit each month, and they have a steady income based off the interest of what you owe.     

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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 just pay the minimum, and you can 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), both the size of your payments and how long you'll have to be paying them are variable. Each new purchase can dramatically extend the time that its going to take you 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 basically 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!  

This is because the dollar you gave them back only repaid the interest which built over those five years. This is key 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 you're thinking about the price.  

Then, decide if a thing which is normally worth $100 to you is actually worth $115, since there is 15% interest added. In a similar fashion, 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 as opposed to debt more easily.

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