What is credit card interest?

Read time:

3–4 minutes

First things first:

Credit card interest is extra money you owe if you don’t pay off your card in time. The credit card company charges you interest if you don’t pay them pack in time. You will need to pay back this interest in addition to the amount you already owed.

If you’re new to the credit card topic, click here first for some information on what a credit card is!

Finance Foundations

When you make purchases on a credit card, you have to, later on, pay the credit card company back. After all, you’re just using their money – it’s not actually yours. You use their money to pay for something and then later on use your money to pay them back. Credit card companies expect you to pay them back in about a month (or sooner if you can!).

But what if you just… don’t?

You could just decide to run away and live in a cottage far out in the woods and ignore the $324 you spent on coffee this month. I’ve heard that the weather is lovely in Yellowstone national park. You could just live there amongst the bears and wolves and moose and your life would probably be quite lovely.

Unfortunately, if you plan to continue living your normal life, the credit card company must be dealt with, and if you don’t pay them back, they will penalize you.

That $324 will now be $330.72. Next month you’ll owe $337.58. That number is just going to keep on going up until the 54 coffees you bought costs you thousands of dollars, leaving you in financial ruin.

Now, I don’t want you thinking that interest is stressful! However, interest can be stressful, so we’ll just have to deal with this the best way we can.

One excellent way to avoid owing interest is to pay back the credit card company when they ask you to. If you’re supposed to pay it off on the 10th of every month, try to pay it off a little bit before then! It will also help if you only spend as much money as you have. The credit card company may allow you to spend $1,000. That doesn’t mean you actually have $1,000 to pay them back on time.

What I’m saying is, if you have $96, you can’t buy 54 coffees. You’ll, devastatingly, only be able to buy about 16. If you treat your credit card like cash or a debit card, you’ll be able to make your payment on time, and you won’t be charged interest. Hooray!

So if you only have $32, you should not buy something with your credit card that costs $40.

“But what if I get paid Friday?”

That is excellent. I would still recommend you just wait to spend that $40 until Friday.

Are there exceptions? Of course. If you’re struggling for food, have medical bills to pay, need gas in your car to go to work, or another emergency, you may need to spend the credit card company’s money and worry about paying them back later. If there is a true emergency, your health and well being come first.

More than anything else, I care about you. I know that even in a dire situation, spending too much on a credit card can lead to interest, which leads to debt, which later leads to a very stressful financial situation. I don’t want that for you! I know how fast $40 can become $50 and then $100 and then $1,000. The snowball rolls quickly, and it’s hard to stop.

Honestly, I’ve been there before. It’s one of the reasons I care so much about teaching Finance! I don’t want any of you to get stressed about money, and avoiding credit card interest can certainly help.

Here’s 3 Things you can do to avoid snowballing credit card interest:

If you miss a payment and get hit with that extra interest payment, prioritize paying back the full amount you owe. Catching it early on can save you so much headache later
Don’t spend more than you have
Pay back the credit card company before the due date