Credit cards are convenient and allow you to make purchases online, book hotels, build credit, and pay for large purchases over time.
Some cards offer rewards that give cardholders cash back or discounts, and using your credit card responsibly helps your credit score.
But for all the benefits, this type of consumer debt also has an ugly side.
If you aren't careful about the way you use them, your purchases can end up costing you a lot more than you think.
Carrying a balance on your credit card might be convenient, but it always ends up costing you more money over time as interest accrues.
To illustrate this, consider the following: would you rather pay $3,000 now or $60 every month for the rest of your life? In such an extreme situation, the choice is obvious.
Even though the monthly amount is less than the larger sum, paying small installments over a longer period of time costs you a lot more.
However, many people choose to pay less every month and a lot more over time.
This idea has driven millions of Americans into excessive credit card debt and eventually costs them far more than the value of their purchases.
If you have a credit card with an annual percentage rate of 14 percent (which is about average as of 2011) and have about $3,000 on your card, your minimum monthly payment will probably hover somewhere around $60.
If you paid no more than the minimum $60 every month, it would take you about 17 years and cost you an additional $3,310 to pay off the $3,000 debt, costing $6,310 to pay off the debt in full.
And that's assuming you don't buy anything else - people who constantly make purchases and carry a balance on their cards are in even worse situations.
One of the reasons this type of debt accumulates so quickly is compound interest.
When interest on a debt is compounded, the cardholder is charged interest on the principal amount plus interest that has accumulated.
Using the example above, 14 percent of $3,000 is $420, which means that much interest is added every year.
That means you will pay about $35 of interest the first month, so only $25 of your $60 payment is actually going toward your debt.
When you carry a $3,000 balance on your credit card, this is what happens every month.
After the first month your debt totals $2,975, but when interest is compounded monthly, the next month's interest is 1.
17 percent (one month's share of the 14 percent) of $2,975, or $34.
80 - only slightly less than the month before.
This accumulation of interest is what makes credit card debt so difficult to pay off.
It may be more convenient to make purchases now and tell yourself you will pay them off later, but carrying a balance on your credit card ends up costing you a lot more money in the long run.
Be careful with your debts and always pay them off as soon as possible to ensure you save as much as you can on your credit card bill.
Some cards offer rewards that give cardholders cash back or discounts, and using your credit card responsibly helps your credit score.
But for all the benefits, this type of consumer debt also has an ugly side.
If you aren't careful about the way you use them, your purchases can end up costing you a lot more than you think.
Carrying a balance on your credit card might be convenient, but it always ends up costing you more money over time as interest accrues.
To illustrate this, consider the following: would you rather pay $3,000 now or $60 every month for the rest of your life? In such an extreme situation, the choice is obvious.
Even though the monthly amount is less than the larger sum, paying small installments over a longer period of time costs you a lot more.
However, many people choose to pay less every month and a lot more over time.
This idea has driven millions of Americans into excessive credit card debt and eventually costs them far more than the value of their purchases.
If you have a credit card with an annual percentage rate of 14 percent (which is about average as of 2011) and have about $3,000 on your card, your minimum monthly payment will probably hover somewhere around $60.
If you paid no more than the minimum $60 every month, it would take you about 17 years and cost you an additional $3,310 to pay off the $3,000 debt, costing $6,310 to pay off the debt in full.
And that's assuming you don't buy anything else - people who constantly make purchases and carry a balance on their cards are in even worse situations.
One of the reasons this type of debt accumulates so quickly is compound interest.
When interest on a debt is compounded, the cardholder is charged interest on the principal amount plus interest that has accumulated.
Using the example above, 14 percent of $3,000 is $420, which means that much interest is added every year.
That means you will pay about $35 of interest the first month, so only $25 of your $60 payment is actually going toward your debt.
When you carry a $3,000 balance on your credit card, this is what happens every month.
After the first month your debt totals $2,975, but when interest is compounded monthly, the next month's interest is 1.
17 percent (one month's share of the 14 percent) of $2,975, or $34.
80 - only slightly less than the month before.
This accumulation of interest is what makes credit card debt so difficult to pay off.
It may be more convenient to make purchases now and tell yourself you will pay them off later, but carrying a balance on your credit card ends up costing you a lot more money in the long run.
Be careful with your debts and always pay them off as soon as possible to ensure you save as much as you can on your credit card bill.