How Credit Becomes Debt
Credit is a wonderful thing. Who doesn’t love being able to buy pretty much anything with nothing more than a piece of plastic. Using credit cards is convenient and even in style. Characters on television and in the movies do it. Actors in commercials do it. Even the people you see in line in front of you are doing it. It’s fast, simple, and fun. Paying with a credit card is something that makes today’s younger generation feel like adults, and makes the older generation feel young again. Credit is in!
The problem is that credit can much too easily turn into debt. The basic premise of credit is that since I know you have the money, I’ll let you wait and pay me later. “Buy now, pay later” could actually be considered the new motto of entire society. Almost every kind of business offers some type of buy now, pay later plan. We, as shoppers, tend to take full advantage of these deals. In many instances, this system even works in our favor. We can get our broken pipes fixed when we need to, instead of waiting until we can afford to. We can buy that special present in time for a birthday today, despite the fact that we won’t get paid until the end of the week. The problem comes when we don’t actually pay the credit back at the end of the week – or at the end of the month.
Credit remains simply credit as long as we actually pay for the item or service within the specified time period. This can quickly turn into debt, however, when we fail to pay. And debt is often far more costly to us than the price we had originally agreed on. Just ask the people of Hamlin after the Pied Piper collected on their unpaid debt!
Let’s take a look at credit cards. During the month you may choose to charge a number of goods and services to your card. You are simply taking advantage of your credit. At the end of the month the credit card company – the “piper” – asks you to pay your credit. Things are going exactly as you expected. However, the credit card company doesn’t insist, as the piper did, that you pay it off all at once. Instead, they offer you another great deal. Instead of paying off your entire credit, you can simply make a minimum payment. Well, great! You can still have some extra cash and spend even more money that way. The problem, however, is that once you choose not to pay your credit in full, you now have debt.
Oh, yes, by simply choosing to pay the minimum payment instead of the entire balance, you now have a debt. And it gets worse very quickly. The credit card company immediately begins to charge you interest on that debt. That interest is actually added to the debt, making your debt bigger. Of course, you still don’t have to worry about paying it off, because next month you can decide to pay the minimum payment again, right? Unfortunately, that is how a small debt begins to turn into a large debt. Next month you aren’t just going to be paying interest on the original debt. You’ll also be paying interest on any new credit you used and failed to pay in full. Worse still, you’ll be paying interest on the interest that you have already been charged. I’m sure you can see how this can spiral out of control. Eventually, you will find that paying the minimum payment is no longer simply an option, but the only choice you have. That is how credit becomes debt.