Credit card debt has a tendency to accumulate, especially at the end of the year. With holiday shopping, travel and the children home for winter break, expenses can increase a lot in the last two months of the year.
Many people spend several months early in the new year paying off credit card debt that they accrue in November and December each year. Not only will these people pay for the price of the items they purchased, but they may also pay hundreds of dollars in other costs as well before they repay the money borrowed via credit card.
What are some of the ways that credit cards drain consumers of money?
Beware of interest rates
Credit card companies often brag about low introductory rates or balance transfer interest rates that are quite competitive. However, the interest rate the average person pays on a purchase is likely many times higher than the prime rate.
Often, people pay over 20% interest, especially if they have missed a payment and no longer qualify for the best possible rates. Certain credit card use comes with higher costs. Cash advances typically have higher interest rates than standard in-store purchases, for example.
Over-the-limit fees and similar charges
Did you make a charge that, after the company assess interest on your standing balance, actually exceeded your permitted credit limit? If so, then the credit card company can charge you a fee for that and for every statement where you exceed the limit on your account.
They can also charge you a fee for making a payment late even by a couple of days or having a payment returned by your bank. Those charges can add up to hundreds of dollars that you have to pay in addition to the existing balance on the account from the money you spent.
Low monthly minimum payments
To many people, a low monthly payment seems like a great benefit of using credit cards. They will have to spend less of their budget on that bill every month.
Of course, that means that you will ultimately spend far longer paying the debt off and will pay much more than you might realize in interest. Some people will pay twice what the item actually cost when they factor in the interest they pay by making monthly payments on a balance over the course of several years.
Understanding how credit card companies design their financing to trap you in debt can help you decide if you are capable of regaining control over your current credit card balances. Realizing that you may need to file for bankruptcy to resolve your credit card debt could lead to more stable finances in the future.