To use your credit cards wisely, it helps to understand some basics about how they work and the potential traps you can get caught in.
Credit card issuers set a limit, called your available credit, on what you can borrow each billing period. Every billing period they send a statement with the details of what you’ve spent. But, they let you make a minimum payment instead of repaying the total for the period.
Lenders aren’t just being nice. When you pay less than the full amount, you pay interest on any balance that remains. That means the lender earns more money. The interest is added to what you owe, increasing your debt — which is how you can end up spending more than the original cost of an item.
Want to see how quickly these charges can snowball? Take a look at what someone who used a credit card with a 14.4% APR to charge $3,000 could end up paying if no more charges were added to the account and no payments were ever late.*
| Make no additional charges and pay each month |
The balance will be paid off in |
Total payments will be about |
Total interest payment will be |
| $3,000 |
1 month |
$3,000 |
$0 |
| $103 |
3 years |
$3,712 |
$712 |
| Only the minimum payment |
11 years |
$4,745 |
$1,745 |
*Source: The Federal Reserve, 2010
