By Deborah Jeanne Sergeant
I magine you want a new laptop for classes ($1,200), a new jacket ($275), a few books ($275), and items for your dorm room ($450).
You take out a personal loan for $2,200 at 26.99% interest.
It does not seem like a lot of money but paying it off over two years will cost you $671 just in interest.
This is how credit debt works. Credit debt is like a personal loan with a terrible interest rate.
Unlike a mortgage or an actual personal loan, credit debt uses compounding interest, not simple interest. Credit card users pay interest on interest on interest, plus the principal (the amount borrowed) until they pay it off.
Compounding interest is why credit card debt is so difficult to pay off. Many credit card holders look at the minimum balance ($119.63 per month in the scenario above) without considering how long it takes to pay it off.
Borrowers also think little of how much interest they pay. Since $119.63 a month is affordable, they continue to use the card and do not realize how much extra they pay for the convenience of getting items now. As a “reward” for paying them so much interest, many credit card companies increase the amount of available credit so card holders can rack up more debt.
Instead of accumulating credit card debt, follow these steps:
• Pay with your debit card or cash.
• Only use a credit card if you have the discipline and dollars to pay off the entire balance when the payment is due. (For credit cards that offer cash back or points towards gift cards, credit cards can benefit you.)
• If you cannot afford something new, buy it used, borrow it, or rent it.
• Look for less expensive versions of what you want.
• Budget your money so you can prioritize your spending. For example, you can wear last year’s jacket instead of buying new (a want) so you can better afford to replace your broken laptop for class (a need).
• Work more hours at your part-time job so you can pay for what you need and want.
• Develop side gigs for extra money, such as tutoring other students, ride sharing apps or delivery services.
• Sell things you no longer need.
• Avoid feeling you must spend money to impress other people. Be yourself—including your financial situation—and remember that true friends will care about you, not how much you can spend.
Deborah Jeanne Sergeant is the author of “Kick Your Credit Card to the Curb: How to Get out of Credit Card Debt for Good,” available at Amazon.com. The book shares tips on earning more, spending less and getting out of credit card debt for life.