It is insane to consider the role that revolving credit plays in our economy and in the lives of families across this planet. The idea of buying something on borrowed money is not a new one, but that doesn’t mean that it is always a good idea. Revolving credit is particularly dangerous in the wrong hands. Put a credit card in the hands of a teenager who is not aware of the pitfalls and you have the potential profile of a young adult in financial trouble before they even get started.
What is revolving credit?
Revolving credit is when a lending source offers you credit up to a certain amount. Once you spend some of that credit, it is taken from your credit limit. Pay it off and then you will have that amount available to you again. The concept is simple, but most people don’t understand that it is a bit more complicated than simple adding and subtracting.
What is the “catch” here?
The elephant in the room with revolving credit is interest. When you don’t pay off your entire balance each month, you are charged a fee called interest on the remaining balance. This can vary from small percentages to quite high, depending on your particular lending source. Interest rates are a primary thing to understand before entering into a revolving line of credit.
Why is Interest so risky?
The worst thing about interest is that you can accrue large amounts of it with even a very small balance on the books. Interest can snowball quite quickly and a $1000 dollar credit line can be eaten up in no time. Then you add the interest and after a few months you are rolling in debt that will only get bigger without a large payment.
Is this why credit cards are considered so dangerous?
Absolutely. Credit cards are offered up to our teens at a very young age and they can quickly get into a mess with interest and revolving credit. It is easy to get on that credit card treadmill where you are suddenly having to use credit to pay credit. Once that happens, you are well on your way to bankruptcy. To give you an idea of what that is like, imagine paying off your credit with a credit card. How long do you think that can last before the amounts catch up to you?
If you or someone you love are considering a revolving line of credit, make sure you educate yourself on the impact of interest. Shop around and get the best possible rate. Most importantly, make sure you pay off what you spend each month to avoid compound charges. This will build your credit profile and help you to get better offers in the future, and keep you out of debt in the process.