Understand the risks of revolving debt

Posted On : May 25, 2011 by Geoffrey Williams

credit card risksRevolving credit is an open line of credit that you can charge things to each month up to the limit set by the credit card issuer.

Some revolving debt arguably won't hurt you and can be a perfectly intelligent financial decision. It's legitimate to use a business credit card to help fund a startup that has a solid business plan and can be reasonably expected to make money. If your car breaks down while you're on a road trip and you suddenly have an $800 car repair bill, it makes sense to use your credit card to get moving again if you have enough cash saved in your emergency fund to pay it off when you get home.

But when you put a pizza on your credit card, along with a bunch of new clothes, and a new iPad, and a trip to the movies, and the birthday gift for your cousin, and you only make a token monthly payment and allow most of the debt to carry over to the next month, and the next month, and your interest begins compounding (meaning your interest starts earning interest) - that's where you can get into trouble fast.

Before you start spending on a credit card, it's worthwhile to go to a credit card calculator, and play around with the numbers and see what you could spend on interest if you only make the minimum payment. It's eye-opening.

0 Responses to "Understand the risks of revolving debt"

No Comments

Leave a Comment