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They Don’t Want You to Pay
In all your dealings with credit cards, remember
this one thing: they don’t want you to pay.
The moment you pay back everything
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you owe, you’re
free from their interest, and that’s not what
they want. They want you to keep on paying them
a little every month for the rest of your life,
making them a steady profit on things you long since
forgot about buying.
Revolving Debt.
Most credit cards are what’s called ‘revolving’
debt – the only real exceptions are American
Express and Diner’s Club cards, which must
still be paid off in full every month. They aren’t
really ‘credit’ cards at all –
they’re charge cards for people who could
afford to pay in cash anyway.
Revolving debt means that you can pay off as much
as you like each month, or you can just pay the
minimum, and you can run up as much debt as you
want each month, up to the maximum. Unlike a fixed-term
loan (a 20-year mortgage, for example), you don’t
know how much your payments are going to be, and
you don’t know when you’re going to
stop paying. Each new purchase can dramatically
extend the time that it’s going to take you
to get your balance back down to $0.
With a credit card, then, it’s perfectly
possible to keep running a ‘balance’
(a debt) on your card forever, spending a little
sometimes and paying a little back sometimes –
and always paying interest. This is why credit cards
are so profitable for them, and so expensive for
you.
Add the Interest in Your Head.
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Don’t be fooled into thinking that you’ll
never have to pay your credit card’s interest
– sooner or later, for some reason, you will.
A good strategy is to add your card’s yearly
interest rates to everything you buy when you’re
thinking about the price. If that thing is worth
$100 to you, is it worth $115 (15% interest added)?
Likewise, if you buy something with your savings,
take off the interest you get on your savings as
a mental discount. This will help you to make the
differences between savings and debt feel more real
– saving instead of having debt is like having
a money-off coupon you carry around with you all
the time.
A Dollar Today Isn’t a Dollar Tomorrow.
You probably don’t think about it, but using
a credit card basically makes your money worth less
than it would be usually. That’s why it feels
so hard to pay a credit card back – if you
borrow a dollar from a credit card at 15% interest,
sit on it for five years, and then give it back,
guess what? You still owe them the dollar. The dollar
you gave them back was eaten up by interest.
This is one of the biggest things you need to understand
about credit card debt: the longer you have it for,
the bigger the problem it gets. If you have a problem,
the last thing you should do is ignore it, because
it will only get worse – you have to try and
beat it early.
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