I think most people understand how credit cards work. It's actually pretty simple.A credit card is a loan from the bank! You can access this in the form of free money if you pay it back by the due date.
What happens if you do not pay it back on time?
This is where it becomes a loan. The whole balance does not become due, but rather interest on your unpaid balance begins to accrue and you are responsible to make at least the minimum payment.
At this point you are building credit card debt. Again I think most people understand this, but it is amazing how many millions of people find themselves in this predicament.
When you get a credit card with a credit limit this is not free money for ever. You are expected to pay it back and for some people this takes discipline that they do not have.
This creates a cycle that increases credit card debt in a number of ways.
1. Charge to the max. Some people continue to use their credit card until they max it out, that is to say they have reached their credit limit.
2. Take out a second credit card. Some credit card companies are their own worst enemy. They are like vultures seeking out potential customers.
This can be bad for you because it makes it easy to take out a second credit card and repeat the steps you just did on your first credit card.
If you do not get your spending habits under control, you can soon find yourself using credit from one card to make the payments on another card. Ultimately this ends up becoming a losing proposition and can lead to skipping payments, or even bankruptcy.
When you take out a credit card be sure you understand it is not free money and there are consequences to how you use it in the future.
