When I was growing up, I can remember my parents always warning me of the dangers of having a credit card. Using credit cards is just too easy. It feels like free money, but it is quite the opposite.
I still do not have a credit card, but I’m starting to realize the importance in having one—and the dangers of having one as well.
We all know the basics: you swipe the card, and it gets charged to an account. The longer you go without paying your payment, the more interest it builds, and the more you owe the company—not to mention possible late charges that may occur when you don’t pay your minimum balance on time.
The credit card company is basically paying for you on the promise that you will pay them back when you can. You owe them a little more (which is called interest,) because they are putting their faith in you to pay it back one day.
It’s easy to see a possible dilemma. This is the age of swiping without thinking.
It’s different with credit cards though. Sure, different card companies have different limits, but the limits are usually set in the thousands of dollars, but it depends on the card and a number of factors about the person’s credit background. Some cards have no maximum limit.
Just to get an idea on how credit cards work, let’s say I charged $100 to a credit card. Let’s say the interest rate is 20 percent. Credit card companies give their customers a month of a free period before they have to pay the bill.
I have to pay at least the minimum balance, let’s say it’s $20. With the 20 percent interest rate for the month and $100 charged, I am only paying for interest. None of the principle will be paid for. In this case, I would have to pay more than the minimum balance in order to shrink that $100 balance.
A problem would arise if my minimum balance was $10. With the 20 percent interest rate on that same $100, I am only paying half of the interest I owe ($10) and still none of the $100. Next month, I would owe the 20 percent interest on $110 because I didn’t pay all the interest from the previous month.
Interest rates usually change month-to-month, depending on the balance of the card.
All of this is hypothetical; there are so many factors that go into each credit card company, and even more factors that go into determining APR and minimum balances for each month. Some card companies even have charges for their customers that carry the card, regardless if they use it or not.
Credit cards are useful to have to build credit or to use in emergencies. When the day comes to get a credit card, I will abide by the rules of my parents: use it only on the pretense that I can pay it back in full at the end of the month.