So how do we end up in trouble with credit cards? There are a few ways.

Purchases and Cash Advances. The first, most obvious way is to simply make too many purchases using credit cards. Cash advances can get even trickier because credit card companies often charge a much higher rate of interest on advances than they do on purchases. The credit company does not necessarily match your credit limit with how much you can realistically afford to pay back. So even though you may have a $10,000 credit limit, that doesn’t mean you can afford to pay a $10,000 loan back (which is what your credit limit represents). You should keep a close eye on how much of a balance you’re running up. Is your balance nearing 50% of your credit limit? 85%? When you run up, or even “max out” (meaning you’ve charged up to your credit limit) your credit cards, you may already be in over your head financially. Unfortunately many families find themselves financially forced to charge everyday items like groceries and utilities and continually roll over the balance, which leads to our next category of credit card fees…

Late fees and rolling over balances. If you are late paying your bill the credit company slaps a sometimes-hefty late fee. That fee then is wrapped into your account balance, which, remember, is charged interest. Also, the credit card company can increase your interest rate if you don’t pay your balance. Rising interest rates can increase your debt significantly even if you pay your bill but you pay it late.

Interest payments. Unless you pay off your credit card balance every month, you are paying interest. Interest is a fee that the credit company charges you for using their money. It is a percentage of your balance. An example of simple interest is if someone charges you 5% interest on a $10 loan you will have to repay them $10.50 – the initial $10 you borrowed and the .50 is the fee, or interest, they charged you for borrowing the money to begin with.

The potentially dangerous thing with credit card debt is that it is not simple interest. Credit card debt is an example of compounding interest. In other words, if you don’t pay your entire balance in Month 1 then in Month 2 you will have to pay the initial amount you borrowed and the interest on that loan. If you don’t pay the balance off again in Month 2, then in Month 3 you will have to continue to pay off the balance AND the interest fee is wrapped into that amount so now you’re paying interest on the interest you were charged to begin with!

Let’s take a look at what compounding interest does over time to your credit card debt: