the most common form of credit for average consumers, yet experience has shown me that most people don’t understand how they work.
It is understandable because the terms and conditions tend to be overly complicated and heavy with financial jargon.
It is not always possible for a non-financially trained person to understand the language, terms, mechanisms and true impact on their financial lives without first investing hours of confusion and frustration. It can be very difficult to find someone to help who does not have a vested interest in you signing up for that product or service.
First and foremost, the goal of credit card companies or banks that issue them is to earn interest from unpaid balances. Never forget that. The longer you leave the balance unpaid, the more they earn.
In my experience, providers clearly communicate your obligation to pay a minimum amount each month by a certain date. This is calculated as a percentage of the outstanding balance at the end of the month. If you don’t pay this amount on time, the bank will charge you a late payment fee. This is usually a set flat fee and is not dependent on the total amount you owe.
It’s a common misconception that you do not incur interest if you pay the minimum amount each month. This is not true. Many people have told me the credit card salesperson misled them on this point. You only avoid paying interest if you pay off the full balance each month.
Compounding happens when the bank charges you interest on interest. This happens when you do not pay off your card in full and so the bank adds an interest charge to your balance due.
If you do not pay your card balance off in full, the next month you are paying interest not only on the money you charged to the card but also on the interest from the previous month.