{"id":2168,"date":"2016-09-23T17:03:28","date_gmt":"2016-09-23T17:03:28","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/waymaker-collegesuccess\/?post_type=chapter&#038;p=2168"},"modified":"2024-05-01T18:49:15","modified_gmt":"2024-05-01T18:49:15","slug":"text-credit-card-opportunities","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-collegesuccess-2\/chapter\/text-credit-card-opportunities\/","title":{"raw":"Credit Card Opportunities","rendered":"Credit Card Opportunities"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">Describe the opportunities, risks, and rewards of owning a credit card<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"wp-image-2170 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/605\/2016\/09\/23165935\/12696032183_0d9622ae98_z.jpg\" alt=\"Close up of corners of four credit cards on a table, fanned to show their logos: 2 Visas and 2 Mastercards\" width=\"350\" height=\"197\" \/>\r\n<h2 data-type=\"title\">Getting and Using a Credit Card<\/h2>\r\n<p id=\"fs-idm377654880\">One of the most controversial aspects of personal finance is the use of\u00a0<span id=\"term58\" class=\"no-emphasis\" data-type=\"term\">credit cards<\/span>. While credit cards can be an incredibly useful tool, their high interest rates, combined with the how easily credit cards can bury you in debt, make them extremely dangerous if not managed correctly.<\/p>\r\nFor many college students, who may\u00a0not have a lot of money or even a job at all, owning a credit card may seem out of reach. Without money in an account and assurance that you can pay your monthly credit\u00a0bill, the average student\u00a0may not\u00a0seem very credit-worthy. Still, it can be important to build a credit history for certain opportunities down the road (such as getting\u00a0a loan to buy a house). You may be surprised to learn that there are plenty of companies that offer special options for younger customers, especially students. The following are some offers to look for:\r\n<ul>\r\n \t<li><strong>Error forgiveness<\/strong>: Since\u00a0you\u00a0may be new to the\u00a0responsibility of owning\u00a0a credit card, it\u2019s good to look for plans with error forgiveness. This may\u00a0include a zero-percent annual percentage rate (APR) for the first six months of a contract or waive\u00a0user penalties if you miss or have\u00a0a late monthly payment for the first time.<\/li>\r\n \t<li><strong>No extra fees<\/strong>: Along with zero-percent APRs for the first six months, some credit cards don\u2019t charge students for using their cards in other countries. This feature is nice for students interested in studying or traveling abroad.<\/li>\r\n \t<li><strong>A report to all three credit\u00a0<\/strong><b>bureaus<\/b>: Student credit cards should report to all three major credit bureaus. It's important for TransUnion, Equifax, and Experian to have records of your credit history because they use that information to calculate your credit score. Your credit score will be used to evaluated your credit worthiness for loans and more.[footnote]Cannon, Ellen and Melissa Lambarena. \"How to Choose a Student Credit Card.\" <em>NerdWallet<\/em>,\u00a028 Oct 2021, www.nerdwallet.com\/article\/credit-cards\/choose-student-credit-card.[\/footnote]<\/li>\r\n<\/ul>\r\n<section id=\"fs-idm355103024\" data-depth=\"2\">\r\n<h2 data-type=\"title\">How to Use a Credit Card<\/h2>\r\n<p id=\"fs-idm357243328\">All the benefits of credit cards are destroyed if you carry credit card debt. Credit cards should be used as a method of paying for things you can afford, meaning you should only use a credit card if the money is already sitting in your bank account and is budgeted for the item you are buying. If you use credit cards as a loan, you are losing the game.<\/p>\r\n<p id=\"fs-idm326888560\">Every month, you should pay your credit card off in full, meaning you will be bringing the loan amount down to zero dollars. If your statement says you charged $432.56 that month, make sure you can pay off all $432.56. If you pay off your bill in full every month, you won\u2019t ever pay any interest on the credit card.<\/p>\r\n<p id=\"fs-idm369654480\">But what happens if you don\u2019t pay your bill off in full? If you are even one cent short on the payment, meaning you pay $432.55 instead, you must pay <strong>daily interest<\/strong> on the entire amount from the date you made the purchases. Your credit card company, of course, will be perfectly happy for you to make smaller payments\u2014that\u2019s how they make money. It is not uncommon for people to pay twice as much as the amount purchased and take years to pay off a credit card when they only pay the minimum payment each month.<\/p>\r\n\r\n<h3 id=\"fs-idm370308720\"><strong data-effect=\"bold\">What to Look for in Your Initial Credit Card<\/strong><\/h3>\r\n<ol id=\"fs-idm380104608\">\r\n \t<li>\r\n<p id=\"fs-idm327913440\"><strong>Find a Low-Rate Credit Card:<\/strong> Even though you plan to never pay interest, mistakes will happen, and you don\u2019t want to be paying high interest while you fix a misstep. Start by narrowing the hundreds of card options to the few with the lowest APR (annual percentage rate). However, be mindful of introductory offers of low APR, as those are likely to change to much higher APR rates after the introductory period is over.<\/p>\r\n<\/li>\r\n \t<li>\r\n<p id=\"fs-idm358440560\"><strong>Avoid Cards with Annual Fees or Minimum Usage Requirements:<\/strong> Your first credit card should ideally be one you can keep forever, but that\u2019s expensive to do if they charge you an annual fee or have other requirements just for having the card. There are many options that won\u2019t require you to spend a minimum amount each month and won\u2019t charge you an annual fee.<\/p>\r\n<\/li>\r\n \t<li>\r\n<p id=\"fs-idm372474256\"><strong>Keep the Credit Limit Equal to Two Weeks\u2019 Take-Home Pay:<\/strong> Even though you want to pay your credit card off in full, most people will max out their credit cards once or twice while they are building their good financial habits. If this happens to you, having a small credit limit makes that mistake a small mistake instead of a $5,000 mistake.<\/p>\r\n<\/li>\r\n \t<li>\r\n<p id=\"fs-idm354595936\"><strong>Avoid Rewards Cards:<\/strong>\u00a0Rewards systems with credit cards are designed by experts to get you to spend more money and pay more interest than you otherwise would. Until you build a strong habit of paying off your card in full each month, don\u2019t step into their trap.<\/p>\r\n<\/li>\r\n<\/ol>\r\n<\/section>\r\n<div class=\"textbox tryit\">\r\n<h3>Try It<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/a072a2e1-9992-4ccd-9598-778b34a97a94\r\n\r\n<\/div>\r\n<h2>Risks and Rewards\u00a0of Credit<\/h2>\r\nCredit cards can give students new opportunities, but owning\u00a0them is also a big responsibility. Students should consider the advantages\u00a0and disadvantages of credit before choosing the best plan.\r\n<h3>Credit Pros<\/h3>\r\n<ul>\r\n \t<li><strong>Secure and convenient method of making purchases:<\/strong> When you carry cash, you have the potential of having the money lost or stolen. A credit card or debit card, on the other hand, can be canceled and replaced at no cost to you.<\/li>\r\n \t<li><strong>Greater consumer protections than debit cards:<\/strong> These consumer protections are written into law, and with credit cards you have a maximum liability of $50. With a debit card, you are responsible for transfers made up until the point you report the card stolen. In order to have the same protections as with credit cards, you need to report the card lost or stolen within forty-eight hours. The longer you wait to report the loss of the card, or the longer it takes you to realize you lost your card, the more money you may be responsible for, up to an unlimited amount.[footnote]\u201cLost Or Stolen Credit, ATM, and Debit Cards.\u201d <em>Federal Trade Commission: Consumer Information<\/em>, Aug.\u00a02012, www.consumer.ftc.<wbr \/>gov\/articles\/0213-lost-or-<wbr \/>stolen-credit-atm-and-debit-<wbr \/>cards.[\/footnote]<\/li>\r\n \t<li><strong>Building credit<\/strong>: If you pay off your monthly credit card every month on time, you will start building credit and have a good credit score early on. Your credit score can be an important factor later on if you decide to open another account or take out a loan. Some employers may even want to see your credit history. While most people associate a credit score with getting better rates on loans, credit scores are also important to getting a job, lowering car insurance rates, and finding an apartment.[footnote]Trouesh, Joshua Escalante. \u201cFour Surprising Ways Your Credit Score Will Affect Your Life.\u201d\u00a0<em>Purposeful Finance<\/em>, 2016, www.purposefulfinance.org\/home\/Articles\/2016\/four-surprising-ways-your-credit-score-will-affect-your-life.[\/footnote]<\/li>\r\n<\/ul>\r\n<h3>Credit Cons<\/h3>\r\n<ul>\r\n \t<li><strong>Overspending<\/strong>: If something is out of sight, it may\u00a0be out of mind and the same can be true of money.\u00a0Sometimes people overspend with credit cards because it\u2019s easy to think that you have more money than you really do.<\/li>\r\n \t<li><strong>Interest<\/strong>: Credit card companies with student deals still typically include some level\u00a0of APR or interest rate. If you don't pay off the entire balance every month, using a credit card can be expensive. Suppose you\u00a0decide to use your\u00a0credit card to pay for\u00a0$1,000 in school supplies and books. Credit Card 1 has an APR of ten percent, and Credit Card 2 has an APR of twenty-four percent. If it takes you a year to pay off the\u00a0$1,000, you'd actually\u00a0pay\u00a0a total of $1,055.04 with Credit Card 1 and $1,134.72 with\u00a0Credit Card 2\u2014that's $55 for the first card or $135 for the second card on top of the original $1,000 you charged. This example highlights the importance of making sure you pay off the balance as soon as possible AND choosing a credit card with\u00a0a lower interest rate.<\/li>\r\n \t<li><strong>Debt<\/strong>: Unlike debit cards, credit cards allow users to borrow money that they can\u00a0pay back at a later date. While this allowance can be useful in emergency situations, you may end up charging more than you can afford to pay back right way, and you may find yourself saddled with debt. Carrying a lot of debt can damage your credit history and credit score.<\/li>\r\n<\/ul>\r\n<h2 data-type=\"title\">The Danger of Debt<\/h2>\r\n<p id=\"fs-idm333400288\">When you take out a loan, you take on an obligation to pay the money back, with interest, through a monthly payment. You will take this\u00a0<span id=\"term57\" class=\"no-emphasis\" data-type=\"term\">debt<\/span>\u00a0with you when you apply for auto loans or home loans, when you enter into a marriage, when you buy a home, and so on. Effectively, you have committed your future income to the loan. While student loans can be a good idea, if you take on too many loans, your future self will be poor no matter how much money you make. To make it worse, you\u2019ll be transferring more and more of your money to the bank through interest payments.<\/p>\r\n\r\n<section id=\"fs-idm326061952\" data-depth=\"2\">\r\n<h3 data-type=\"title\">Compounding Interest<\/h3>\r\n<p id=\"fs-idm365021408\">While compounding works to make you money when you are earning interest on savings or investments, it works against you when you are paying the interest on loans. To avoid <strong>compounding interest<\/strong> on loans, make sure your payments are at least enough to cover the interest charged each month. The good news is that the interest you are charged will be listed each month on the loan account statements you are sent by the bank or credit union, and fully amortized loans will always cover the interest costs plus enough principal to pay off what you owe by the end of the loan term.<\/p>\r\n<p id=\"fs-idm327805680\">The two most common loans on which people get stuck paying compounding interest are credit cards and student loans. Paying the minimum payment each month on a credit card will just barely cover the interest charged that month while anything you buy with the credit card will begin to accrue interest on the day you make the purchase. Since credit cards charge interest daily, you\u2019ll begin paying interest on the interest immediately, starting the compound-interest snowball working against you. When you get a credit card, always pay the credit card balance down to zero dollars each month to avoid the compound interest trap.<\/p>\r\n<p id=\"fs-idm338664768\">Student loans are another way you can be caught in the compound-interest trap. When you have an unsubsidized student loan or put your loans into deferment, the interest continues to rack up on the loans. Again, you\u2019ll be charged interest on the interest, not just on the original loan amount, forcing you to pay compound interest on the loan.<\/p>\r\n\r\n<\/section><section id=\"fs-idm365682288\" data-depth=\"2\"><section id=\"fs-idm331846656\" data-depth=\"3\">\r\n<div class=\"textbox exercises\">\r\n<h3>credit card debt explained<\/h3>\r\nCheck out this video for more information on how interest can work against you when you're making minimum payments on your credit card.<iframe src=\"\/\/plugin.3playmedia.com\/show?mf=7010050&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=Vz05A6cP6Iw&amp;video_target=tpm-plugin-0k0pvhty-Vz05A6cP6Iw\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe>\r\n\r\n<\/div>\r\n<h3 data-type=\"title\">Signs You Have Too Much Debt<\/h3>\r\n<p id=\"fs-idm353200288\">You can consider yourself in too much debt if you have any of the following situations:<\/p>\r\n\r\n<ul id=\"fs-idm358277776\">\r\n \t<li>You cannot make your minimum credit card payments.<\/li>\r\n \t<li>Your money is gone before your next paycheck.<\/li>\r\n \t<li>Bill collectors are contacting you.<\/li>\r\n \t<li>You are unable to get a loan.<\/li>\r\n \t<li>Your paycheck is being garnished by a creditor.<\/li>\r\n \t<li>You are considering a debt consolidation loan with extra fees added.<\/li>\r\n \t<li>Your items are repossessed.<\/li>\r\n \t<li>You do not know your debt or financial situation.<\/li>\r\n<\/ul>\r\n<\/section><\/section>\r\n<div class=\"textbox learning-objectives\">\r\n<h3>glossary<\/h3>\r\n<strong>compound interest:<\/strong> this is effectively interest paid on interest, which can snowball and result in an unmanageable debt load later on\r\n\r\n<strong>daily interest:<\/strong> what credit card issuers charge each day from the date of making a card purchase\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li style=\"font-weight: 400;\">Describe the opportunities, risks, and rewards of owning a credit card<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-2170 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/605\/2016\/09\/23165935\/12696032183_0d9622ae98_z.jpg\" alt=\"Close up of corners of four credit cards on a table, fanned to show their logos: 2 Visas and 2 Mastercards\" width=\"350\" height=\"197\" \/><\/p>\n<h2 data-type=\"title\">Getting and Using a Credit Card<\/h2>\n<p id=\"fs-idm377654880\">One of the most controversial aspects of personal finance is the use of\u00a0<span id=\"term58\" class=\"no-emphasis\" data-type=\"term\">credit cards<\/span>. While credit cards can be an incredibly useful tool, their high interest rates, combined with the how easily credit cards can bury you in debt, make them extremely dangerous if not managed correctly.<\/p>\n<p>For many college students, who may\u00a0not have a lot of money or even a job at all, owning a credit card may seem out of reach. Without money in an account and assurance that you can pay your monthly credit\u00a0bill, the average student\u00a0may not\u00a0seem very credit-worthy. Still, it can be important to build a credit history for certain opportunities down the road (such as getting\u00a0a loan to buy a house). You may be surprised to learn that there are plenty of companies that offer special options for younger customers, especially students. The following are some offers to look for:<\/p>\n<ul>\n<li><strong>Error forgiveness<\/strong>: Since\u00a0you\u00a0may be new to the\u00a0responsibility of owning\u00a0a credit card, it\u2019s good to look for plans with error forgiveness. This may\u00a0include a zero-percent annual percentage rate (APR) for the first six months of a contract or waive\u00a0user penalties if you miss or have\u00a0a late monthly payment for the first time.<\/li>\n<li><strong>No extra fees<\/strong>: Along with zero-percent APRs for the first six months, some credit cards don\u2019t charge students for using their cards in other countries. This feature is nice for students interested in studying or traveling abroad.<\/li>\n<li><strong>A report to all three credit\u00a0<\/strong><b>bureaus<\/b>: Student credit cards should report to all three major credit bureaus. It&#8217;s important for TransUnion, Equifax, and Experian to have records of your credit history because they use that information to calculate your credit score. Your credit score will be used to evaluated your credit worthiness for loans and more.<a class=\"footnote\" title=\"Cannon, Ellen and Melissa Lambarena. &quot;How to Choose a Student Credit Card.&quot; NerdWallet,\u00a028 Oct 2021, www.nerdwallet.com\/article\/credit-cards\/choose-student-credit-card.\" id=\"return-footnote-2168-1\" href=\"#footnote-2168-1\" aria-label=\"Footnote 1\"><sup class=\"footnote\">[1]<\/sup><\/a><\/li>\n<\/ul>\n<section id=\"fs-idm355103024\" data-depth=\"2\">\n<h2 data-type=\"title\">How to Use a Credit Card<\/h2>\n<p id=\"fs-idm357243328\">All the benefits of credit cards are destroyed if you carry credit card debt. Credit cards should be used as a method of paying for things you can afford, meaning you should only use a credit card if the money is already sitting in your bank account and is budgeted for the item you are buying. If you use credit cards as a loan, you are losing the game.<\/p>\n<p id=\"fs-idm326888560\">Every month, you should pay your credit card off in full, meaning you will be bringing the loan amount down to zero dollars. If your statement says you charged $432.56 that month, make sure you can pay off all $432.56. If you pay off your bill in full every month, you won\u2019t ever pay any interest on the credit card.<\/p>\n<p id=\"fs-idm369654480\">But what happens if you don\u2019t pay your bill off in full? If you are even one cent short on the payment, meaning you pay $432.55 instead, you must pay <strong>daily interest<\/strong> on the entire amount from the date you made the purchases. Your credit card company, of course, will be perfectly happy for you to make smaller payments\u2014that\u2019s how they make money. It is not uncommon for people to pay twice as much as the amount purchased and take years to pay off a credit card when they only pay the minimum payment each month.<\/p>\n<h3 id=\"fs-idm370308720\"><strong data-effect=\"bold\">What to Look for in Your Initial Credit Card<\/strong><\/h3>\n<ol id=\"fs-idm380104608\">\n<li>\n<p id=\"fs-idm327913440\"><strong>Find a Low-Rate Credit Card:<\/strong> Even though you plan to never pay interest, mistakes will happen, and you don\u2019t want to be paying high interest while you fix a misstep. Start by narrowing the hundreds of card options to the few with the lowest APR (annual percentage rate). However, be mindful of introductory offers of low APR, as those are likely to change to much higher APR rates after the introductory period is over.<\/p>\n<\/li>\n<li>\n<p id=\"fs-idm358440560\"><strong>Avoid Cards with Annual Fees or Minimum Usage Requirements:<\/strong> Your first credit card should ideally be one you can keep forever, but that\u2019s expensive to do if they charge you an annual fee or have other requirements just for having the card. There are many options that won\u2019t require you to spend a minimum amount each month and won\u2019t charge you an annual fee.<\/p>\n<\/li>\n<li>\n<p id=\"fs-idm372474256\"><strong>Keep the Credit Limit Equal to Two Weeks\u2019 Take-Home Pay:<\/strong> Even though you want to pay your credit card off in full, most people will max out their credit cards once or twice while they are building their good financial habits. If this happens to you, having a small credit limit makes that mistake a small mistake instead of a $5,000 mistake.<\/p>\n<\/li>\n<li>\n<p id=\"fs-idm354595936\"><strong>Avoid Rewards Cards:<\/strong>\u00a0Rewards systems with credit cards are designed by experts to get you to spend more money and pay more interest than you otherwise would. Until you build a strong habit of paying off your card in full each month, don\u2019t step into their trap.<\/p>\n<\/li>\n<\/ol>\n<\/section>\n<div class=\"textbox tryit\">\n<h3>Try It<\/h3>\n<p>\t<iframe id=\"assessment_practice_a072a2e1-9992-4ccd-9598-778b34a97a94\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/a072a2e1-9992-4ccd-9598-778b34a97a94?iframe_resize_id=assessment_practice_id_a072a2e1-9992-4ccd-9598-778b34a97a94\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<h2>Risks and Rewards\u00a0of Credit<\/h2>\n<p>Credit cards can give students new opportunities, but owning\u00a0them is also a big responsibility. Students should consider the advantages\u00a0and disadvantages of credit before choosing the best plan.<\/p>\n<h3>Credit Pros<\/h3>\n<ul>\n<li><strong>Secure and convenient method of making purchases:<\/strong> When you carry cash, you have the potential of having the money lost or stolen. A credit card or debit card, on the other hand, can be canceled and replaced at no cost to you.<\/li>\n<li><strong>Greater consumer protections than debit cards:<\/strong> These consumer protections are written into law, and with credit cards you have a maximum liability of $50. With a debit card, you are responsible for transfers made up until the point you report the card stolen. In order to have the same protections as with credit cards, you need to report the card lost or stolen within forty-eight hours. The longer you wait to report the loss of the card, or the longer it takes you to realize you lost your card, the more money you may be responsible for, up to an unlimited amount.<a class=\"footnote\" title=\"\u201cLost Or Stolen Credit, ATM, and Debit Cards.\u201d Federal Trade Commission: Consumer Information, Aug.\u00a02012, www.consumer.ftc.gov\/articles\/0213-lost-or-stolen-credit-atm-and-debit-cards.\" id=\"return-footnote-2168-2\" href=\"#footnote-2168-2\" aria-label=\"Footnote 2\"><sup class=\"footnote\">[2]<\/sup><\/a><\/li>\n<li><strong>Building credit<\/strong>: If you pay off your monthly credit card every month on time, you will start building credit and have a good credit score early on. Your credit score can be an important factor later on if you decide to open another account or take out a loan. Some employers may even want to see your credit history. While most people associate a credit score with getting better rates on loans, credit scores are also important to getting a job, lowering car insurance rates, and finding an apartment.<a class=\"footnote\" title=\"Trouesh, Joshua Escalante. \u201cFour Surprising Ways Your Credit Score Will Affect Your Life.\u201d\u00a0Purposeful Finance, 2016, www.purposefulfinance.org\/home\/Articles\/2016\/four-surprising-ways-your-credit-score-will-affect-your-life.\" id=\"return-footnote-2168-3\" href=\"#footnote-2168-3\" aria-label=\"Footnote 3\"><sup class=\"footnote\">[3]<\/sup><\/a><\/li>\n<\/ul>\n<h3>Credit Cons<\/h3>\n<ul>\n<li><strong>Overspending<\/strong>: If something is out of sight, it may\u00a0be out of mind and the same can be true of money.\u00a0Sometimes people overspend with credit cards because it\u2019s easy to think that you have more money than you really do.<\/li>\n<li><strong>Interest<\/strong>: Credit card companies with student deals still typically include some level\u00a0of APR or interest rate. If you don&#8217;t pay off the entire balance every month, using a credit card can be expensive. Suppose you\u00a0decide to use your\u00a0credit card to pay for\u00a0$1,000 in school supplies and books. Credit Card 1 has an APR of ten percent, and Credit Card 2 has an APR of twenty-four percent. If it takes you a year to pay off the\u00a0$1,000, you&#8217;d actually\u00a0pay\u00a0a total of $1,055.04 with Credit Card 1 and $1,134.72 with\u00a0Credit Card 2\u2014that&#8217;s $55 for the first card or $135 for the second card on top of the original $1,000 you charged. This example highlights the importance of making sure you pay off the balance as soon as possible AND choosing a credit card with\u00a0a lower interest rate.<\/li>\n<li><strong>Debt<\/strong>: Unlike debit cards, credit cards allow users to borrow money that they can\u00a0pay back at a later date. While this allowance can be useful in emergency situations, you may end up charging more than you can afford to pay back right way, and you may find yourself saddled with debt. Carrying a lot of debt can damage your credit history and credit score.<\/li>\n<\/ul>\n<h2 data-type=\"title\">The Danger of Debt<\/h2>\n<p id=\"fs-idm333400288\">When you take out a loan, you take on an obligation to pay the money back, with interest, through a monthly payment. You will take this\u00a0<span id=\"term57\" class=\"no-emphasis\" data-type=\"term\">debt<\/span>\u00a0with you when you apply for auto loans or home loans, when you enter into a marriage, when you buy a home, and so on. Effectively, you have committed your future income to the loan. While student loans can be a good idea, if you take on too many loans, your future self will be poor no matter how much money you make. To make it worse, you\u2019ll be transferring more and more of your money to the bank through interest payments.<\/p>\n<section id=\"fs-idm326061952\" data-depth=\"2\">\n<h3 data-type=\"title\">Compounding Interest<\/h3>\n<p id=\"fs-idm365021408\">While compounding works to make you money when you are earning interest on savings or investments, it works against you when you are paying the interest on loans. To avoid <strong>compounding interest<\/strong> on loans, make sure your payments are at least enough to cover the interest charged each month. The good news is that the interest you are charged will be listed each month on the loan account statements you are sent by the bank or credit union, and fully amortized loans will always cover the interest costs plus enough principal to pay off what you owe by the end of the loan term.<\/p>\n<p id=\"fs-idm327805680\">The two most common loans on which people get stuck paying compounding interest are credit cards and student loans. Paying the minimum payment each month on a credit card will just barely cover the interest charged that month while anything you buy with the credit card will begin to accrue interest on the day you make the purchase. Since credit cards charge interest daily, you\u2019ll begin paying interest on the interest immediately, starting the compound-interest snowball working against you. When you get a credit card, always pay the credit card balance down to zero dollars each month to avoid the compound interest trap.<\/p>\n<p id=\"fs-idm338664768\">Student loans are another way you can be caught in the compound-interest trap. When you have an unsubsidized student loan or put your loans into deferment, the interest continues to rack up on the loans. Again, you\u2019ll be charged interest on the interest, not just on the original loan amount, forcing you to pay compound interest on the loan.<\/p>\n<\/section>\n<section id=\"fs-idm365682288\" data-depth=\"2\">\n<section id=\"fs-idm331846656\" data-depth=\"3\">\n<div class=\"textbox exercises\">\n<h3>credit card debt explained<\/h3>\n<p>Check out this video for more information on how interest can work against you when you&#8217;re making minimum payments on your credit card.<iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=7010050&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=Vz05A6cP6Iw&amp;video_target=tpm-plugin-0k0pvhty-Vz05A6cP6Iw\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<\/div>\n<h3 data-type=\"title\">Signs You Have Too Much Debt<\/h3>\n<p id=\"fs-idm353200288\">You can consider yourself in too much debt if you have any of the following situations:<\/p>\n<ul id=\"fs-idm358277776\">\n<li>You cannot make your minimum credit card payments.<\/li>\n<li>Your money is gone before your next paycheck.<\/li>\n<li>Bill collectors are contacting you.<\/li>\n<li>You are unable to get a loan.<\/li>\n<li>Your paycheck is being garnished by a creditor.<\/li>\n<li>You are considering a debt consolidation loan with extra fees added.<\/li>\n<li>Your items are repossessed.<\/li>\n<li>You do not know your debt or financial situation.<\/li>\n<\/ul>\n<\/section>\n<\/section>\n<div class=\"textbox learning-objectives\">\n<h3>glossary<\/h3>\n<p><strong>compound interest:<\/strong> this is effectively interest paid on interest, which can snowball and result in an unmanageable debt load later on<\/p>\n<p><strong>daily interest:<\/strong> what credit card issuers charge each day from the date of making a card purchase<\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-2168\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>College Success. <strong>Authored by<\/strong>: Jolene Carr. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Image of credit cards. <strong>Authored by<\/strong>: Sean MacEntee. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/flic.kr\/p\/kkUu3B\">https:\/\/flic.kr\/p\/kkUu3B<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><li>College Success. <strong>Authored by<\/strong>: Amy Baldwin. <strong>Provided by<\/strong>: OpenStax; Modified by Lumen Learning. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/openstax.org\/books\/college-success\/pages\/10-4-credit-cards-and-other-debt\">https:\/\/openstax.org\/books\/college-success\/pages\/10-4-credit-cards-and-other-debt<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Credit Card Debt Explained With a Glass of Water. <strong>Provided by<\/strong>: Total Debt Relief. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.youtube.com\/watch?v=Vz05A6cP6Iw&#038;t=28s\">https:\/\/www.youtube.com\/watch?v=Vz05A6cP6Iw&#038;t=28s<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section><hr class=\"before-footnotes clear\" \/><div class=\"footnotes\"><ol><li id=\"footnote-2168-1\">Cannon, Ellen and Melissa Lambarena. \"How to Choose a Student Credit Card.\" <em>NerdWallet<\/em>,\u00a028 Oct 2021, www.nerdwallet.com\/article\/credit-cards\/choose-student-credit-card. <a href=\"#return-footnote-2168-1\" class=\"return-footnote\" aria-label=\"Return to footnote 1\">&crarr;<\/a><\/li><li id=\"footnote-2168-2\">\u201cLost Or Stolen Credit, ATM, and Debit Cards.\u201d <em>Federal Trade Commission: Consumer Information<\/em>, Aug.\u00a02012, www.consumer.ftc.<wbr \/>gov\/articles\/0213-lost-or-<wbr \/>stolen-credit-atm-and-debit-<wbr \/>cards. <a href=\"#return-footnote-2168-2\" class=\"return-footnote\" aria-label=\"Return to footnote 2\">&crarr;<\/a><\/li><li id=\"footnote-2168-3\">Trouesh, Joshua Escalante. \u201cFour Surprising Ways Your Credit Score Will Affect Your Life.\u201d\u00a0<em>Purposeful Finance<\/em>, 2016, www.purposefulfinance.org\/home\/Articles\/2016\/four-surprising-ways-your-credit-score-will-affect-your-life. <a href=\"#return-footnote-2168-3\" class=\"return-footnote\" aria-label=\"Return to footnote 3\">&crarr;<\/a><\/li><\/ol><\/div>","protected":false},"author":19,"menu_order":17,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"College Success\",\"author\":\"Jolene Carr\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Image of credit cards\",\"author\":\"Sean MacEntee\",\"organization\":\"\",\"url\":\"https:\/\/flic.kr\/p\/kkUu3B\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"College Success\",\"author\":\"Amy Baldwin\",\"organization\":\"OpenStax; 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