What I Wish I Had Known

What I Wish I Had Known

Pormezz /

Pormezz /

While credit cards are often necessary to build credit and bridge the gap for people living paycheck to paycheck, they can also be a dangerous way to rack up debt that is difficult to get out of.

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Many people who sign up for a credit card don’t pay enough attention to the fine print that states the actual interest rate. Others don’t understand how interest accrues, or whether they’re paying off the principal or interest with their monthly payments.

If you don’t understand the terms of a credit card, you could make choices you’ll regret later, as one young woman discovered the hard way.

Building credit at high costs

Devon Corra of Brooklyn, New York, regrets her understanding of how credit cards work now that she’s in more debt than she’d hoped. She considers herself someone who’s always been responsible with money, but never had any formal financial literacy training, at home or in school. She got her first credit card at age 19.

Corra focused on building credit, realizing that a good credit score would be important to her future, but she didn’t know much else about how credit cards worked. “So I went into it knowing that I had to build credit. I wasn’t going to make the same mistakes as my parents, who weren’t very responsible. I went into it being very, very smart and responsible.”

At first, she used her credit card primarily for food, gas, groceries and other necessities that she had to pay for anyway. “Then I paid that amount back every month,” she said.

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Inflation strikes

Unfortunately, when Corra was out of work for a while, she turned to credit to get by. And when she got back to work — at Trader Joes, where she hopes to work her way up to a managerial position — inflation had skyrocketed. Her boyfriend works as a commission salesperson, and they’re also raising his two children, ages 12 and 14.

“It’s crazy here. Eating out is like doing the grocery shopping for the week, especially with two kids. All our money goes to bills. So I do a treat on a card every once in a while, or something for myself once a year,” she said.

Over the past four years, she said her debt has “gotten out of control.” Even though she’s not as in debt as other people she knows, it’s still scary.

Now, between two credit cards, she has over $10,000 in debt. On the card with the most debt, she pays $200 in interest each month and doesn’t even touch the principal. On the smaller card, she pays about $90 a month, with less than $20 of that going toward the principal.

The mystery of interest

She finds it confusing how interest accrual works. “I still don’t really know what that means. I don’t know what to look for in a card.”

Recently, a friend alerted her to the possibility of taking out a bank loan with a lower interest rate to pay off her credit card so she could pay off her debts.

Because as things stand now, she explained, “I’m basically thinking I’m never going to pay this off unless I get a big tax bill or a work bonus or something.” Corra added, “I’m just kind of gambling that I’m going to have this forever and just trying to live with it.”

She hopes she can pay off her debts better, but given her current expenses and salary that is not very likely.

An increasing credit line

One of the things that surprised her is that paying off debt — like paying off her car — actually caused her credit score to drop. Another surprise is that despite carrying balances, her credit limit keeps going up.

That was partly why she fell into a “debt spiral” while unemployed. “I had a big line of credit, so I thought, ‘OK, I’ll just use this for a little while,’” she said. But it didn’t take long for that “little bit” to add up.

“They keep raising my limit and I still have thousands more to spend. I’m not going to spend it, but what if I didn’t have that self-control, or what if I didn’t know? They keep trying to get me into more and more debt,” she said.

As Corra tries to figure out her next steps, she and her boyfriend are trying to do a better job of teaching the kids financial literacy. “We’re trying to teach them what we weren’t taught about these kinds of things,” she said.

If you’re struggling with debt that seems unmanageable, there are always options beyond just paying interest forever. Talking to a financial advisor, tax advisor, or debt counselor can open up avenues for getting out of debt.

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This article originally appeared on I Pay More Than $200 a Month in Interest on My Credit Card Debt: What I Wish I Had Known