I did a post talking about credit card debt and and my attempts to get out of it in late 2024 (here). I am still in said debt, and the number is still the same amount. So, before I dive into re-managing my own debt, here is credit cards, explained.
Explained: Their purpose
Credit cards are bank cards that give you access to borrowing money from other institutions (companies or banks etc). This can be used as an alternative to borrowing money from friends and family. There is always a little more pressure and strain from borrowing money from people you know, so a credit card removes having to look someone in the eye. The catch of borrowing money from these establishments, is that they charge you for borrowing that money. How much? That depends on them. You can choose who you get a credit card with, purely depending on that figure alone.
How much you can borrow is also dependant on your credit score, history and income. Each card has a limit. Cross it, and witness a debt spiral out of control.
Explained: Credit scores
Credit scores are (probably) an arbitrary scale showing how trustworthy you are lending money to. Companies look at this value and determine whether they give you a large credit limit, or a small one. Your score is dependant on your previous history with credit, such as phone bills, other credit cards, loans and mortgages, as well as your salary. The better you score, the more credit they will trust you with.
For example, when I got my first credit card, they gave me a limit of £1200. Back then it felt like a lot, but now my debt is more than that on the same card. So, I am very grateful that my limit is no longer that amount. They gave me £1200, because I had minimal or no credit history. My parents paid for my phone, I had no mortgage, and my salary was a student salary. Now, I am 3.5 years into being a full-time adult, with a much bigger salary, so my limit has increased by roughly 5 times. This was thanks to my credit score improving, due to having a credit card and managing it carefully.
Explained: How they work
The part that I am still trying to figure out.
So, each month you spend on your credit, the company is keeping tabs on what you have borrowed. After a month, they send you a statement showing you what you spent, and asking you to pay for that. They give you 3 options on how to pay:
- The minimum payment – It’s not paying back in full, but paying a fraction of it, that you will most likely afford.
- Pay an amount more than minimum payment, but less than the full amount – That’s pretty self-explanatory.
- Pay the whole bill.
You have to pay by a specific date and if you don’t, then you get charged interest. This amount is a percentage of the money that is left to be paid. And it cumulates the longer you don’t pay off the full bill. So, if you had £10 left on a card charging you 29.9% interest, then you would be charged £12.99. If you didn’t spend any money in the next month, and also didn’t pay that original £12.99 back. Then your next statement will be charging you £16.87. And so on.
Things to note
I have mentioned that my credit limit has increased since I first got it (in 2020). Because of those increases, it means the interest I get charged also increases. I think when I got the credit card I was on 29%, but I am definitely in the 30’s% right now.
The interest on credit cards is normally big compared to other forms of credit, like mortgages and loans. This is why it’s recommended that you focus on your credit card debts (or high interest debts), before investing and enjoying your life. I have recently understood this point, and that’s why I have been credit card debt for a while now. Especially since the number is pretty stable, even with me making reasonable payments towards the debt.
Summary
Credit cards are complicated. I literally wrote about them 4 months ago, and I am still learning things. It’s annoying, because I have paid a lot towards my credit card, but I am doing better, and it takes time when addressing debt. Now all I need to do is stay consistent and time will do the rest. (unless I miraculously start making extra money and I will pay it off faster without destroying myself).
TL;DR
- Credit cards are hard to understand. I am still learning things 5 years since getting one.
- I have explained credit cards in a way that I understand (based on my experience), and hopefully it helps you understand how they work.
- Time will honestly tell on my progress to crush my credit card debt, but for now I am enjoying the lessons.
