Credit cards may be a convenient way to pay for things that don’t fit conveniently into your budget right at the moment, but too much credit can become a nightmare of endless payments and escalating debt. In many cases, if you were to only make the minimum payment on your credit card debt, you would pay more than the amount of your original purchases in interest alone before you paid the debt in full. Obviously, this is not an ideal situation and we would all like to avoid it if possible. This is why you need to clearly understand how credit card interest works and how to use credit to your advantage as much as possible.
The average credit card charges about a 20% annual interest rate. That can translate to thousands of dollars paid out in interest alone if you carry a significant balance on your credit card. The longer you carry a balance, the more interest you will be charged. In most cases, if you owed $1000 on your credit card, and you paid off $950 this month and planned to pay off the last $50 next month, you would get an unpleasant surprise when you received your next bill, because they will still be charging you interest on the full $1000 debt, not the $50 you still owe, and they will continue to do that until the full $1000 has been paid. This might feel like a sneaky and unfair tactic on the part of the credit card issuer – and it is – but you won’t get anywhere complaining because it is clearly written out in the credit card agreement that you accepted their terms when you accepted the card.
The smartest way to use credit is to pay off the balance of your card every month. Most cards have a grace period where they don’t charge you any interest – the grace period is usually 20 to 30 days – and if you pay the charges in full, you will not be charged any interest at all. Sadly, the reason credit card issuers are among the richest companies in the world is that hardly anyone uses credit wisely.
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