How Does A Credit Card Debt Build Up?

Over the past 4 decades, credit cards have taken the world of consumerism by storm. This tiny plastic gives you freedom to purchase any goods or service at which ever corner of the world you are at. You can use it to pay your utility bills or hotels bills while on holiday. The credit card companies display glossy advertisements on the easy and user friendly features of the plastic that draws millions of customers every minute to use their cards around the globe. However, if not used wisely, this plastic has the potential to drive anybody to bankruptcy. Today credit card debt has become as large a phenomenon as the card itself and millions of consumers from around the world are suffering from it. Let us take a look at how a small purchase can build up into a huge debt on your credit card.

How does the interest charge structure work?

When a customer first uses his card, the credit card company gives him a small grace period to make his payment of the complete balance of the card. If this is done, there is no interest charged on his card. However, if a partial payment is made, the credit card company will charge interest on the complete balance from the date of purchase till the date of billing on the average amount of balance on the account in a daily basis.

For example, on the 1st of a month, you swipe your credit card for $100. If you payoff the complete $100 by your billing date, let us put it at 25th of the same month, you will not be charged any interest. However, incase you make only a partial payment of $50 on the 15th of the month, then you would be charged daily interest on $100 from the 1st till the 14th of the month and then on $50 (remainder balance amount) from the 15th to the 25th (billing date) of the month. Therefore, even if you miss payment of $1 from your complete outstanding balance, you would be charged interest on the complete amount that you originally charged on your account.

Why does the debt not come down?

Most credit card users make payments of only the minimum amount due every month instead of the complete balance. As a result, a large part of the monthly payment goes off in interest charges rather than bringing down the principal balance on the account. Let us take an example of a new credit card user who swipes his card for $1000 in the first month. If he makes a payment of the minimum amount due (which can range from anywhere between 5% and 15% of total outstanding balance) of let us say $150, as much as $110 can go towards interest payment, thus reducing his outstanding balance by just $40.

As in most cases, if this user again uses his card the next month, his outstanding balance would increase further. If due to whichever circumstances, he misses his monthly payment, he is not only charged the complete interest but also heavy penalty which can range anywhere between 20% and 30% of the outstanding balance.

It can therefore be said, that if a user does not manage his credit card usage and payment wisely, he can very easily end up in a heavy debt even before he realizes.