How Credit Cards Work (for the COMPLETE BEGINNER)
Written By: Nick Nguyen | Read full profile
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Before you go off and get your first credit card STOP. As a general rule of thumb when it comes to money and finance, you want to know as much as you possibly can about something before you dive gungho into using it.
Here’s the gist of how credit cards work.
It’s a short term loan.
That swanky looking piece of plastic (or it’s super fancy - metal) is essentially a key to getting in debt. What happens is you’ll swipe that card to buy something, and the cost will get tracked in some computer system somewhere. After ~30 days, you’re going to get this piece of paper that tells you where you were swiping that card and how much you made the credit card company paid on your behalf. Yup. You had that kind of power. But it’s short-lived because if you can’t pony up the money to pay it all back by the due date then they own you.
How they make money.
So if you were responsible, you’d not swipe that card and rack up a number higher than you can pay off at the end of the month. But if you didn’t know this beforehand or got swipe happy and went on a shopping spree (been there, done that), you’ll find this number to be much higher than what you have in your bank account. Now sure, you just have to pay the minimum balance. The problem is when you do, all the money that you didn’t pay back gets charged as much as 23.99% in interest!
So let’s say you spent $100, but you only paid the minimum balance of $25. That remaining $75 starts accruing 23.99% interest daily.
Okay, so they won’t slap you with all 23.99%, you’re going to be charged 23.99% spread out over 365 days. That means every day, your total balance will be increased by ~0.06%. Now sure, at first it’s just a few pennies, but what if you never pay them back and you just keep using your credit card until the credit limit gets maxed out again?
If you’re $75 turned into $400 a few weeks later because you just had to have a Boba and Banh Mi a day (I know, sometimes I can’t resist either...) and you never pay back that $400 and just keep paying the minimum, well at the end of the year, you’ll have given them about $80 in interest.
You just paid for someone’s steak and lobster dinner...WITH DESSERT!
Pay off the ENTIRE balance each month. This will prevent you from owing any money that will start accruing interest. Use compounding interest to your advantage through investing money in stocks, bonds, and index funds. Don’t let it eat away at your wealth from a credit card!
**Nguyening Lifestyles is not a registered financial service provider and is not liable for any decisions you make regarding credit cards or managing your debt. We are simply here to entertain and provide content for educational purposes only. Therefore, we are not liable in any capacity for any actions that may result from reading this post. Proceed with caution when using any type of credit card, credit line, debt, credit reporting company, etc.
Check out my other posts on how you can avoid overspending with credit cards and even creatively use them to earn some extra money yourself!
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