Unfortunately, part of the reason that consumer debt is at an all-time high is because of credit cards. It's due to a combination of misunderstanding credit cards and abusing them. While credit card abuse is a more personal matter, credit card education is something people should undertake when acquiring a card.
The most important aspect to understand about credit cards is that it's a "revolving" account. Unlike most mortgages and car loans, which have set terms such as 5, 10, 20, and 30 years, revolving accounts stay open and require payment for as long as a balance exists. This applies not only to credit cards, but to other lines of credit such as personal loans and home equity loans.
Being a revolving account, credit cards have minimum payments that must be paid in order to keep your account current. Minimum payments are usually a percentage of your outstanding balance. The percentage can range from 10% to 30%. If you only pay the minimum payment, interest continues to accrue at a torrid pace. If you continue to pay the minimum, it can take a very long time to pay off a credit card balance. A $ 4,000 balance, for example, can take up to 40 years to pay off if only the minimum payment is made, depending on the interest rate.
Obviously, the key to shortening credit card debt is to pay more than the minimum amount due. When you pay more than the minimum amount, you pay down your principal, which is the actual amount that you borrowed. The lower your principal, the less interest accrues on your account.
Next, understanding your interest rate is key to managing credit card debt. Generally, the better your credit and the higher your scores, the lower interest rate you pay. It's in your best interest to maintain and boost your credit scores when applying for credit cards. More than that, however, you want to understand how your interest rate works. Interest accrues on a regular time frame. Some cards accrue interest daily, while others accrue monthly. Some cards accrue interest on your average monthly balance, while others accrue interest on the actual balance.
Another aspect of interest rates is the grace period. Normally, credit card companies will give you 25 days from the time you make a charge until interest begins to accrue. There are some cards, however, that will accrue interest from the first day you use the card, such as the Discover Card.
If you are able to pay off your credit cards in full every month, interest rate is not as big as a factor for you. However, if the card accrues interest without a grace period, you must pay your balance immediately in order to avoid excess interest.
You must also be aware of introductory interest rates. Many companies entice you to apply by giving you an introductory interest rate that is well below normal card rates. Sometimes you get rates as low as 0%. Find out exactly when this interest rate expires. You do not want to be carrying a balance on that date. The same goes for store credit cards that promise no payments or no interest for several months. For example, Sears might offer you 6 months of no interest financing for a $ 1000 washing machine. Interest does not accrue for the first 6 months, and you do not even have to pay the bill for those first 6 months. However, just because you're not paying interest does not mean it's not accruing. Once the six months are over, all the interest that you've accrued will retroactively take effect.
In addition to no-interest offers, be cautious of balance-transfer offers. These offers also give a promotional rate. However, the fine print will tell you if the rate only applies to the balance that's transferred, or to new purchases made with the card, or both. Sometimes, you may transfer a balance hoping that your new rate is 1.9%, only to find out that 1.9% only applies to new purchases, while transfers get 19.99%.
Your best protection against credit card debt is to educate yourself about the cards you use, and to keep your credit scores high. By boosting your score, you'll have better access to the best interest rates, allowing you to slice the interest you're paying.