Credit Cards and the debt cycle 

Something good gone wrong 

While credit cards can be useful and convenient, and make many things during these modern digitized times easier and safer, they are also a common predecessor to potential financial disaster for many consumers.  Credit cards have become far and away the leading cause of financial turmoil for the average American, with many young people now beginning to plunge into debt much earlier than their parents.  It is estimated by the U.S. Treasury Department that the typical consumer these days carries a staggering nine cards and an average total of $13,000 in revolving, interest-heavy debt.  To find out more, learn how credit cards really operate.

By using this loan calculator, you can see for yourself how long it can take to pay off your credit card debt. 

Why is it called revolving debt?

Credit cards are referred to as revolving debt because they usually never get paid off by the user and simply revolve while the interest continues to compound. Yes, of course, making your monthly payments is important, but look deeper and contemplate where that principal is heading over time.  By making only the monthly payment, you are just paying the interest while keeping your creditors at bay. This way of using credit is only profitable for the credit company. You will continue to drown in debt if you continue to making only the minimum payments.  Another side effect of paying the monthly minimum is that you will actually see your debt increase because the interest payment will eventually be more than your monthly payment. 

Look at the numbers 

Here is a simplified example to show you how easy it is to trap yourself in the cycle of credit card debt. Say you have $5,000 on a card and you are paying this off at an interest rate (APR) of 15%. Assume you pay this sum off in one year. In that year, to pay off the loan, you would need to make monthly payments of $451.29. By the end of this year you will have paid back the $5,000 plus $415.48 in interest.   

Now let’s take that same $5,000 and pay if off using the minimum payment of $80.67.  Let’s also spread out this loan to ten years. During those ten years you will pay the $5,000 credit card loan plus another $4689.40 in interest.  At this rate, you have paid almost $2.00 for every $1.00 spent.   It sounds crazy, and if you like to keep the money you earn, it is.  However people are doing it everyday without realizing the damage they are causing themselves, and you may very well be one of them. 

Video: How to use a loan calculator 

The way out 

Stop revolving credit card debt now before it gets you in real trouble with your bills and creditors.  Follow these simple steps to avoid letting your credit card debt get the best of you:

1. Transfer those high interest balances to other cards with lower interest
2. Never make a minimum monthly payment, pay down your cards as much as possible.
3. Cut up those extra cards, don’t cancel them.  Retaining more than 3 cards is asking for trouble.  Keep it simple.  Any cards over 10% APR should not be in your wallet.  Canceling cards could negatively affect your credit score.  Just stop using the ones you currently have. 
4. Throw away offers for new credit cards; you don’t need them.
5. Negotiate for a lower interest rate on your high interest rate cards. Companies will typically give you the lower interest rate to keep you as a customer. 
   

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