The credit card that you get in the mail is an awesome thing. This little piece of plastic with flashy graphics and a microchip that knows you better than you know your own mother. It recognizes you when you are out alone without enough cash to pay for food. It lets you buy things you really want late at night from the comfort of your own bed. It allows suppliers to track what you like and notify you when there are deals that you need to know about. It provides security when you are far away from home. Is it any wonder it feels like magic?
I met someone recently who didn’t know that their credit card charged interest. Don’t judge them – they were dutifully making their minimum payments on time.
When you start using a credit card, you need to know that you are borrowing money. If you don’t pay the whole amount you borrowed within a month, a special charge is added to your balance, about 2%. This is called “interest”. Every month you don’t pay off the full amount you owe, and put more purchases on your card, the interest gets charged – another 2% every month. Over a year that adds up to about 24%. That is a very high rate of interest.
Interest is charged on the interest you haven’t paid. Interest on interest is the worst kind. In the criminal world it’s called loan sharking. You need to know that credit card companies are like loan sharks.
Except that they won’t break your legs. Credit card companies like it when you don’t pay off your monthly balance. Because then they can keep charging you interest. Most credit card holders don’t run away from their credit card debt. They just keep making that minimum payment, which makes credit card companies very happy because at their rate of interest it would take about 34 years to pay off the borrowed money – that’s a lot of interest. When you go to the bank for a loan or a mortgage, they look at your credit profile. If you are carrying a balance on credit cards, the bank is as likely to offer to roll it into your new loan as they are to say “tsk, tsk”. The credit card companies are owned by the banks, and they know you will soon have a new balance to pay interest on, so everyone is happy that you don’t pay off your credit card bill every month.
Now that’s magic.