{"id":8800,"date":"2018-11-29T11:38:39","date_gmt":"2018-11-29T18:38:39","guid":{"rendered":"https:\/\/www.petersons.com\/blog\/?p=8800"},"modified":"2019-02-26T15:47:03","modified_gmt":"2019-02-26T22:47:03","slug":"why-you-should-be-leary-of-credit-cards","status":"publish","type":"post","link":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/","title":{"rendered":"Taking a Look at Compound Interest: Why You Should be Leary of Credit Cards"},"content":{"rendered":"

Student debt recently <\/span>surpassed $1.5 trillion<\/span><\/a>. Yes, <\/span>trillion<\/span><\/i>. Clearly, the vast majority of students finance their college costs. Unfortunately, many students turn to credit cards to pay for incidental costs and living expenses while in college. According to <\/span>NASDAQ<\/span><\/a>, <\/span>student credit card debt averaged $911 in 2015<\/b>. Debt with a high rate of interest for students that are likely to be taking out additional student loans is legitimately concerning, as this can lead to further financial issues down the road. <\/span><\/p>\n

To understand both the positives and negatives students run into when using credit cards<\/b>, we talked with Jeff <\/span>Brainard, Co-owner of Noble Wealth Partners. This article will explain the risks of compound interests\u2013which Brainard refers to as a snowball effect\u2013as well as the usefulness of student credit cards and other options.<\/span><\/p>\n

What is compound interest?<\/b><\/h1>\n

In simple terms, compound interest is essentially interest on interest. With credit cards, this means you spend a certain amount and pay only the minimum payment for that month. Then, next month, when you spend money you accumulate interest based on the amount you spent both this month and last month, as well as interest on the interest you did not pay off the month before. But explaining this in literal terms gets wordy and complicated.<\/span><\/p>\n

\u201cThe easy visualization for people to use is a snowball. Starting with a snowball that\u2019s relatively small at the top of a hill, you start rolling the snowball down the hill, and that snowball is going to progressively get larger as it adds snow,\u201d said Brainard to give an analogy to compound interest. \u201cThat snowball just keeps getting bigger and bigger as it goes down the hill.\u201d<\/span><\/p>\n

The snowball Brainard refers to is accumulated debt due to compound interest. In this case, you do not want the snowball. However, it\u2019s important to remember that the snowball is not always bad. The flip side of compound interest can be beneficial to young people. For example, when you save money in a bank account or other savings vehicle that accumulates interest, you get to reap the benefits of compound interest. <\/span><\/p>\n

\u201cIf you want a big snowball from a retirement perspective, you can start with a very little snowball and compound interest over the next 30, 40, 50 years is going to be a huge benefit to you,\u201d said Brainard. <\/span><\/p>\n

How can compound interest get you in trouble?<\/b><\/h1>\n

To put things in perspective, Brainard used the example of a college student who runs up a credit card balance of $2,000 that they aren\u2019t able to pay off right away. <\/span><\/p>\n

\u201cThe interest is going to be somewhere between 18 and 20 percent on that credit card, and the minimum payment that the credit card company is going to ask you to pay is going to seem so tantalizingly small that you\u2019re going to pay that and feel like you can borrow money forever,\u201d said Brainard.<\/span><\/p>\n

The problem then becomes the fact that the minimum balance does not pay (or even dip into) the beginning balance of the money you spent.. <\/span><\/p>\n

\u201cWhat ends up happening is, it\u2019s pretty insidious, you\u2019re not even paying the amount of interest you\u2019re accruing every month in that compound interest,\u201d said Brainard. \u201cSo, if I have that $2,000 balance, it\u2019s going to increase in the amount I owe due to the interest that I\u2019m paying every month, and if I\u2019m not reducing that principle balance by any conceivable amount, it\u2019s just going to add to the size of the snowball that\u2019s getting bigger and bigger.\u201d<\/span><\/p>\n

Essentially, when a credit card company asks for a minimum payment, you\u2019re paying just that\u2013the bare minimum you can pay in order to continue borrowing money, which isn\u2019t free.<\/span><\/p>\n

\u201cThe biggest mistake a lot of college students make is they think they can have a little bit of fun with their credit card, make the minimum payments, and theoretically you will never be able to pay off your credit card if you do that. So it gets pretty difficult to get out of that hole once you get started,\u201d said Brainard.<\/span><\/p>\n

What if you slip up?<\/b><\/h1>\n

So, when does compound interest and credit card debt become a significant issue? Can you make the minimum payment once? Twice?<\/span><\/p>\n

\u201cWhen it becomes a problem is when you can\u2019t make a substantial payment back towards it,\u201d said Brainard.<\/span><\/p>\n

Brainard explained that the goal should be to pay it off completely every month, but paying a significant amount of the balance instead of the full amount is the next best thing.. <\/span><\/p>\n

\u201cIf you\u2019re ever in a particular position where you can\u2019t pay it off (the balance) that month, then you need to make some changes going into the next couple of months to get that paid off before you do anything extravagant again,\u201d said Brainard.<\/span><\/p>\n

How can students responsibly use a credit card?<\/b><\/h1>\n

While there are dangers to using credit cards, if you understand how balances and compound interest work, credit cards can be a useful tool for learning budgeting and building credit history.<\/span><\/p>\n

\u201cI think if people just educate themselves and live within their means and understand that that\u2019s money they have to pay back with a little bit of interest they can actually be really beneficial, especially for college students,\u201d said Brainard. <\/span><\/p>\n

Essentially, make sure you don\u2019t charge to your credit card money that you don\u2019t have. And if you do make a mistake and charge more than you have, make paying off that balance a priority even if you have to make a few sacrifices. <\/span><\/p>\n

As for using credit cards as a way to borrow money in college, this usually isn\u2019t the best way to go, and taking a look into different types of smaller student loans can potentially save you a lot of money. Take a look at the math. You may be paying around 20 percent interest on a credit card, but may be able to get a fixed rate loan at a much lower interest rate. Plus, you\u2019ll have a payment schedule so you know what to expect, as opposed to a credit card payment that does not.<\/span><\/p>\n

What are the benefits to students using a credit card?<\/b><\/h1>\n

Because compound interest sounds scary, some people decide not to use credit cards at all. However, there are many benefits to responsibly using a credit card in college. The biggest long-term benefit for students using a credit card responsibly is a build-up of credit history. This small act will help you with big financial decisions later on in life, such as getting loans or a mortgage. <\/span><\/p>\n

\u201cOne of the hardest things when you\u2019re coming out of college is you\u2019re trying to get a job and people want you to have experience, and you can\u2019t get experience until you get a job. Likewise, if you want to borrow money, you have to have a credit history and you can\u2019t have a credit history unless you borrow some money,\u201d said Brainard. \u201cHaving a credit card with a low max spending limit on it is a great way to start building up some credit history.\u201d<\/span><\/p>\n

Being able to manage having a credit card for a number of years shows a bank or other loan agency that you\u2019re able to borrow and pay back money, which is important in securing a loan. \u00a0<\/span><\/p>\n

In addition to this, many credit cards offer perks and points that can be helpful to you depending on your lifestyle. For example, if you travel often, an airline credit card could be a huge benefit to you as you can fly for much cheaper. Take a look at different perks credit cards offer to see what would best benefit you.<\/span><\/p>\n

Overall, credit cards can be a very useful tool for college students, as long as you understand the true costs. Prevent a snowball effect by being careful when you charge to your credit card by evaluating what you can and cannot afford. And, if you ever find yourself in trouble, catch the problem early on and prioritize paying off your credit card before you do anything else. Educate yourself and be responsible with your credit card, and you can reap the benefits of having a credit card and a solid credit history rather than face the consequences of credit card debt.<\/span><\/p>\n

See also:\u00a0College Expenses: What to Expect and Ways to Save<\/a><\/strong><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Student debt recently surpassed $1.5 trillion. Yes, trillion. Clearly, the vast majority of students finance their college costs. Unfortunately, many students turn to credit cards to pay for incidental costs and living expenses while in college. According to NASDAQ, student credit card debt averaged $911 in 2015. Debt with a high rate of interest for<\/p>\n","protected":false},"author":28,"featured_media":8803,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[20],"tags":[487,1827,1387],"class_list":{"0":"post-8800","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-scholarships","8":"tag-credit-cards","9":"tag-student-credit-cards","10":"tag-student-debt","11":"ad_tags-sat"},"better_featured_image":{"id":8803,"alt_text":"","caption":"","description":"","media_type":"image","media_details":{"width":1920,"height":1354,"file":"s3:\/\/pcom-wp-media\/blog\/wp-content\/uploads\/2018\/11\/10123615\/credit-card-1991284_1920.png","sizes":{},"image_meta":{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0","keywords":[]}},"post":8800,"source_url":"https:\/\/wp-media.petersons.com\/blog\/wp-content\/uploads\/2018\/11\/10123615\/credit-card-1991284_1920.png"},"acf":[],"yoast_head":"\nCompound Interest & Student Debt | Be Leary of Credit Cards<\/title>\n<meta name=\"description\" content=\"While there are dangers to using credit cards, if you understand how compound interest works, credit cards can be a useful tool. Learn more at Peterson's!\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Compound Interest & Student Debt | Be Leary of Credit Cards\" \/>\n<meta property=\"og:description\" content=\"While there are dangers to using credit cards, if you understand how compound interest works, credit cards can be a useful tool. Learn more at Peterson's!\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/\" \/>\n<meta property=\"og:site_name\" content=\"Peterson's\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/petersons\" \/>\n<meta property=\"article:published_time\" content=\"2018-11-29T18:38:39+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2019-02-26T22:47:03+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/wp-media.petersons.com\/blog\/wp-content\/uploads\/2018\/11\/10123615\/credit-card-1991284_1920.png\" \/>\n\t<meta property=\"og:image:width\" content=\"1920\" \/>\n\t<meta property=\"og:image:height\" content=\"1354\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"Taylor Sienkiewicz\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@Petersons\" \/>\n<meta name=\"twitter:site\" content=\"@Petersons\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Taylor Sienkiewicz\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"7 minutes\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Compound Interest & Student Debt | Be Leary of Credit Cards","description":"While there are dangers to using credit cards, if you understand how compound interest works, credit cards can be a useful tool. Learn more at Peterson's!","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/","og_locale":"en_US","og_type":"article","og_title":"Compound Interest & Student Debt | Be Leary of Credit Cards","og_description":"While there are dangers to using credit cards, if you understand how compound interest works, credit cards can be a useful tool. Learn more at Peterson's!","og_url":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/","og_site_name":"Peterson's","article_publisher":"https:\/\/www.facebook.com\/petersons","article_published_time":"2018-11-29T18:38:39+00:00","article_modified_time":"2019-02-26T22:47:03+00:00","og_image":[{"width":1920,"height":1354,"url":"https:\/\/wp-media.petersons.com\/blog\/wp-content\/uploads\/2018\/11\/10123615\/credit-card-1991284_1920.png","type":"image\/png"}],"author":"Taylor Sienkiewicz","twitter_card":"summary_large_image","twitter_creator":"@Petersons","twitter_site":"@Petersons","twitter_misc":{"Written by":"Taylor Sienkiewicz","Est. reading time":"7 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/#article","isPartOf":{"@id":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/"},"author":{"name":"Taylor Sienkiewicz","@id":"https:\/\/www.petersons.com\/blog\/#\/schema\/person\/4af14b9d9fb2ee25e844a4abb47563d1"},"headline":"Taking a Look at Compound Interest: Why You Should be Leary of Credit Cards","datePublished":"2018-11-29T18:38:39+00:00","dateModified":"2019-02-26T22:47:03+00:00","mainEntityOfPage":{"@id":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/"},"wordCount":1420,"image":{"@id":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/#primaryimage"},"thumbnailUrl":"https:\/\/wp-media.petersons.com\/blog\/wp-content\/uploads\/2018\/11\/10123615\/credit-card-1991284_1920.png","keywords":["Credit Cards","student credit cards","student debt"],"articleSection":["Funding"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/","url":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/","name":"Compound Interest & Student Debt | Be Leary of Credit Cards","isPartOf":{"@id":"https:\/\/www.petersons.com\/blog\/#website"},"primaryImageOfPage":{"@id":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/#primaryimage"},"image":{"@id":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/#primaryimage"},"thumbnailUrl":"https:\/\/wp-media.petersons.com\/blog\/wp-content\/uploads\/2018\/11\/10123615\/credit-card-1991284_1920.png","datePublished":"2018-11-29T18:38:39+00:00","dateModified":"2019-02-26T22:47:03+00:00","author":{"@id":"https:\/\/www.petersons.com\/blog\/#\/schema\/person\/4af14b9d9fb2ee25e844a4abb47563d1"},"description":"While there are dangers to using credit cards, if you understand how compound interest works, credit cards can be a useful tool. Learn more at Peterson's!","breadcrumb":{"@id":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/"]}]},{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/#primaryimage","url":"https:\/\/wp-media.petersons.com\/blog\/wp-content\/uploads\/2018\/11\/10123615\/credit-card-1991284_1920.png","contentUrl":"https:\/\/wp-media.petersons.com\/blog\/wp-content\/uploads\/2018\/11\/10123615\/credit-card-1991284_1920.png","width":1920,"height":1354},{"@type":"BreadcrumbList","@id":"https:\/\/www.petersons.com\/blog\/why-you-should-be-leary-of-credit-cards\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Blog","item":"https:\/\/www.petersons.com\/blog\/"},{"@type":"ListItem","position":2,"name":"Funding","item":"https:\/\/www.petersons.com\/blog\/category\/scholarships\/"},{"@type":"ListItem","position":3,"name":"Taking a Look at Compound Interest: Why You Should be Leary of Credit Cards"}]},{"@type":"WebSite","@id":"https:\/\/www.petersons.com\/blog\/#website","url":"https:\/\/www.petersons.com\/blog\/","name":"Peterson's","description":"Peterson's helps students discover their best fit educational program","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.petersons.com\/blog\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/www.petersons.com\/blog\/#\/schema\/person\/4af14b9d9fb2ee25e844a4abb47563d1","name":"Taylor Sienkiewicz","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/secure.gravatar.com\/avatar\/7741b5bff283798d59e25c5299c761696f4795f49fc2135b7dba7354da99ca0a?s=96&d=mm&r=g","url":"https:\/\/secure.gravatar.com\/avatar\/7741b5bff283798d59e25c5299c761696f4795f49fc2135b7dba7354da99ca0a?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/7741b5bff283798d59e25c5299c761696f4795f49fc2135b7dba7354da99ca0a?s=96&d=mm&r=g","caption":"Taylor Sienkiewicz"},"url":"https:\/\/www.petersons.com\/blog\/author\/taylor-sienkiewicz\/"}]}},"_links":{"self":[{"href":"https:\/\/www.petersons.com\/blog\/wp-json\/wp\/v2\/posts\/8800","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.petersons.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.petersons.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.petersons.com\/blog\/wp-json\/wp\/v2\/users\/28"}],"replies":[{"embeddable":true,"href":"https:\/\/www.petersons.com\/blog\/wp-json\/wp\/v2\/comments?post=8800"}],"version-history":[{"count":0,"href":"https:\/\/www.petersons.com\/blog\/wp-json\/wp\/v2\/posts\/8800\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.petersons.com\/blog\/wp-json\/wp\/v2\/media\/8803"}],"wp:attachment":[{"href":"https:\/\/www.petersons.com\/blog\/wp-json\/wp\/v2\/media?parent=8800"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.petersons.com\/blog\/wp-json\/wp\/v2\/categories?post=8800"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.petersons.com\/blog\/wp-json\/wp\/v2\/tags?post=8800"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}