The snowball effect of credit card debt and how to break it

The Snowball effectIn simple terms, a snowball effect is a situation that increases in size or importance at a faster and faster rate.

Today, I am going to explain the snowball effect of credit card debt, how it ruins your financial life and what you should do to protect yourself from it.

Scenario: Let us say, you spend $ 500 on groceries on your credit card every month. You religiously pay off the whole amount each month. So you are not charged any interest, and life goes on smoothly. Then one day you are bored and decide that you are going to give yourself a treat by eating a burger in Burger King once every month. The burger costs $ 5. So from this month onwards you are going to spend $505. You think- “Hey, it is just 5 dollars a month, I can always pay it later.” So rather than paying off $ 505 dollars a month, you continue paying $500 dollars a month. You are paying 99% of your credit card balance every month. You think  you are doing very well and you should not have any problems.

What really happens:

  • As long as you pay your credit card debt in full every month, the credit card company does not charge interest.
  • But as soon as you do not pay your credit card debt in full, from then on, you are charged full interest from the day you buy till you pay your credit card debt in full. This is where most people get caught.
  • The debt  then starts to snowball till it finally buries you.
  • All, because of one burger in Burger King every month.

This is shown in this document. The calculations were done using this website.

So you can see, the debt keeps snowballing:

  • 1st year: $756
  • 2nd year: $1052
  • 3rd year: $1404
  • 4th year: $1820
  • 5th year: $2312
  • 6th year: $2895
  • 7th year: $3585
  • 8th year: $4402
  • 9th year: $5369
  • 10th year: $6514

So, a harmless $ 5 burger a month for 10 years, which  would cost $ 600 in total has become a debt of $6514, more than a 10 fold increase.

What you should do?

1. Never ever use credit card debt

OR

2. Pay your credit card balance in full every month every time – because they trick you by charging you interest on all your purchases for the whole month even if you only underpay by a few dollars.

Understanding this is very important for your financial health.

 

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