The Danger of Revolving Debt
Credit card debt is one of the most mechanically toxic financial instruments available to consumers. Operating with APRs commonly exceeding 20%, balances compound rapidly if not paid in full every month. Understanding exactly what payment is required to break the cycle by a target date is the first step toward financial freedom.
Credit Defeating Math
Daily Compounding
Unlike mortgages which usually compound monthly, credit cards calculate interest based on your average daily balance. Every day you carry a balance, you are charged interest on yesterday's interest.
The Minimum Payment Trap
Card issuers calculate minimum payments to be roughly 1-2% of the principal + accrued interest. Making only the minimum payment guarantees the debt will take decades to clear and cost you thousands in sheer interest.
The True Cost of Purchases
When carrying a 25% APR balance, buying a $100 pair of shoes and paying it off over three years effectively makes those shoes cost $140.