Credit cards, when used carefully, can be great financial tools. However, you have to make the credit card work for you. If you don't, you end up paying a great deal in interest charges, and your credit card costs end up being in charge of your finances, rather than you being in control of your credit card.
How Much Does Credit Card Interest Cost You?
As long as you pay your balance off each month, you don't have to worry about credit card interest. And that credit card interest can be a real budget killer. Credit card interest is usually quite high. Canadian credit cards often have higher interest rates than the interest rates seen for credit cards in the United States. This means that Canadians have to be even more careful about not carrying interest.
Even if you are earning rewards on your credit card, they aren't going to offset the interest you pay. A 2% cash back rewards program can't compete with 18.99% interest that you pay on a balance carried. Carrying a balance means that you pay interest right into someone else's pocket. And it costs you big. There are numerous credit card interest calculators online that can show you exactly how much interest you pay each month on a carried balance — and it's not pretty.
You should also consider the impact of lost opportunity on your finances. If you are paying interest straight to someone else, you are losing the use of those financial resources. What if, instead of paying interest and receiving nothing in return beyond the privilege of borrowing money, you invested that money. Your money could be earning compound interest. You can't replace the time that your money could have been working on your behalf.
Paying the Minimum Balance
If you are serious about getting out of credit card debt, you need to do more than just pay the minimum balance. When you pay the minimum balance on a credit card, most of your payment goes toward the interest you have been charged for the month. Very little of your payment goes toward reducing the principal.
Your credit card minimum payment isn't designed to help you pay off your debt in the shortest period of time. Instead, it's designed to make the most of the interest that you pay. When you pay only the minimum payment, it can take years to pay off your credit card. On top of that, the amount of interest that you pay can amount to up to three times — or more — than what you originally borrowed.
Paying interest like this saps your own financial resources, and it means that you miss out on opportunities to improve your money situation.
Credit cards can be great financial tools. However, you have to plan your usage. Make sure that your purchases are items that you have already planned to buy. Then, make sure you have enough money to pay off the balance each month. That way, you will be able to make full use of credit cards, without losing money to interest.