Understanding Credit Card Debt

Using Credit Cards and credit card debt… what’s the difference?



Do they want us to have credit card debt? I don’t know about you but it seems that over the course of a week, three to five “Pre-Qualified” Credit card offers arrive in my mailbox. Just the other day two came from the same company. One was for a credit limit of $3,000 and the other for $7,500. I guess they really want me to have a Credit Card and they don’t want anything to hold me back!!!

Having a credit card is really handy. Although I prefer to use cash, using a credit card to purchase some things is just easier… like renting a car or buying a plane ticket and even ordering something online. Notice I said using a credit card not going into credit card debt.

Do You Have Credit Card Debt?

How many times have you heard people say credit cards are bad, you need to get rid of all your credit cards? As with most things in life, it’s not the “object” that is bad, in this case we’re talking about credit cards ... but credit card debt is bad. Using a credit card is simply a trade. The merchant has something you want and you trade “credit” for the product. That’s pretty simple.

How Credit Card Companies Make Money

The credit card company makes their money in a couple of ways. First the merchant doesn’t receive the full amount of the purchase you made. Usually, the credit card company will keep 2-3 % and the merchant gets the rest. So on a purchase of $100 the store gets about $97 dollars and the credit card company keeps $3 dollars. They store gives up a few dollars to get their money right way. The credit card company on the other hand, hopes to wait, and wait, and wait for their money.

They want to be your best buddy and let you “take your time” paying off the new dress, shirts, shoes, or purse. They don’t want you to pay off that credit card purchase in a month. They want you to have credit card debt. Because when you owe them, they’ll be more than happy to give you more credit to buy more.

Why Do They Want You To Have Credit Card Debt?

Let’s go back to the store for a moment. For starters, the credit card company has already made $3 off your purchase of $100. They’re hoping you only send the “Minimum payment” of $10 dollars at the end of one month. Why you ask? Because now that we’re “friends” and you still, owe $90 they’re going to charge you let’s say 12% per year interest. So for one month that’s $.90 cents.

So let’s not buy anymore stuff on our credit card until we pay our $100 purchase off and see what the Credit card company makes off your credit card debt and how much the "shoes" really cost you. Remember the Credit card company already made $3 dollars to start with on the merchant.

Month Payment Monthly Balance Your Cost Credit Card Company
        $3 (starting profit)
Month 1 $10.90 $90 100.90 $.90
Month 2 $10.80 $80 101.70 $.80
Month 3 $10.70 $70 102.40 $.70
Month 4 $10.60 $60 103.00 $.60
Month 5 $10.50 $50 103.50 $.50
Month 6 $10.40 $40 103.90 $.40
Month 7 $10.30 $30 104.20 $.30
Month 8 $10.20 $20 104.40 $.20
Month 9 $10.10 $10 104.50 $.10
Totals $104.50 $7.50


So there you have the reason credit companies love for you to have credit card debt.

Your cost if you paid off your shoes during the first month would have been just what you paid for them $100. By your paying the minimum payment, and keeping credit card debt, the company was able to make an extra $4.50 from you.

Use a credit card for convenience, pay it in full each month, and stay away from credit card debt ... it's your money, use it wisely.

Article submitted by: Gary Antosh of Perfect-Rates.com

Highly Recommended Resources

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Understanding Credit Card Debt, using credit cards wisely, and knowing what credit card debt really costs you.