I. Avoiding debt  

 

Credit cards should only be used if you can pay off the balance immediately. Remember that there can sometimes be a mental disconnect between swiping your card and seeing the money leave your account. Control borrowing by getting yourself on a budget, and use any leftover income to pay down debt beyond your minimum payment (what the credit company or student loan provider requires you to pay). It is important to pay more than the minimum payment to avoid incurring interest. 

 

II. How interest works

 

When you borrow money through student loans or credit card debt, you have to cover the principal and interest. Principal is the amount you initially borrow. For example if you spend $1000 on your credit cards, then that $1000 is your principal amount.  However when you receive your statement you will notice that interest is assessed. If the interest you have is 'simple' interest, interest is calculated off the principal. So, take that same $1000 dollars and add on the interest rate: (20%)($1000) for every year of repayment. Alternatively, compounding interest is calculated on the principal amount and also on the accumulated interest of previous periods, essentially “interest on interest.” For example, taking that same $1000, the first year of interest would be (.20)($1000) but the second year is (.20)($1200) because we take year 1's interest into consideration. Make sure to carefully review the terms of your loan to see what kind of interest you are incurring. 

 

III. Cost of debt

 

Taking the example from the above text, a credit card charge of $1000 would incur $612 in interest costs if you wanted to pay it off in 5 years. This means that you would be paying 20% interest with an expected payment of $26 a month. It also assumes that you don't make any additional charges to the card. This accumulated interest is 60% of your original loan. Don't forget to consider the interest costs and the timeframe in which you want to pay back your debt when charging a card or taking out a loan.