Over and over again, we keep hearing about credit card debt. You’d think, by now, since we’re assailed from all sides with warnings and stories of those who have had their financial lives ruined by irresponsible credit card use, that we’d have learned our lesson, and credit card abuse would be a thing of the past.
Not so. Studies show that credit card debt rises consistently, year after year, and shows no signs of stopping. In fact, things have gotten so bad that the average household now employs somewhere around eight credit cards simultaneously. Even making the minimum payments on such cards every month is a nightmarish situation that would put a strain on anyone’s finances, so why do we let ourselves get into these situations?
Simply put, it all has to do with the way we view credit cards. Ultimately, there are only two ways that the situation can go once you introduce a credit card into your financial life. You can pay off your entire balance each and every month, which means that your credit card company will positively report your actions to your credit agency each month, and you’ll be steadily increasing your credit rating while you use your card to pay off monthly bills and the like.
The much more common alternative, however, is that your card is used to make purchases that you don’t have the money for on hand, resulting in your carrying a balance that you make monthly payments on. This is where the problem comes in. Unlike loans, the amount you must pay on a credit card each month isn’t exactly fixed, and as such, it’s all too tempting to just pay the minimum amount possible each month.
If you do this, however, you’ll soon find yourself overwhelmed with interest rates that slowly cause your balance to climb rather than diminish, until the point where you can no longer afford those minimum payments! Your good intentions will have gotten you into a world of trouble.
What it all seems to boil down to is that most people just don’t understand how interest works, exactly. People imagine that using a credit card to make a major purchase is just like borrowing money and paying it back, but this isn’t the case. Interest is continually accruing on whatever balance you have on your card at any given moment, so any balance higher than zero is putting you that much further into debt.
Think of it this way. For every $1000 you charge on a credit card and then only make minimum payments, it will take you around five years to pay that amount off. Moreover, by the time you do pay it off, you’ll have paid double. This is bad enough when $1000 turns into $2000, but what about those individuals charging amounts like $10,000? It’s easy to see where their nightmare begins.
With this in mind, the proper place for the credit card becomes obvious. When used as a means to pay monthly bills and then immediately cleared of all balances, or retained only for emergencies, credit cards can be a great way to establish credit. Otherwise, however, they are more often than not an invitation to financial ruin. Be careful out there!
Tags: debt consolidation, credit cards, credit card debt, credit card debt consolidation
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