One of the major misconceptions I hear every day regarding credit cards is that it is basically cash. I completely understand you use it like cash but it isn’t quite cash. It’s better to think of a credit card as a small, convenient, personal loan. It’s just like any other car loan, mortgage, phone plan, credit that you can use for purchases in a way that you cannot easily use your mortgage to put gas in your car.

Credit cards are great for convenience and they do offer great rewards, such as cash back, points to redeem for gift cards and such, travel perks, and some forms of baggage, and purchase insurance. Depending on how sophisticated the perks are, they may also have fees attached. It’s best to start off with a simple credit card that will earn you rewards points or cash back with no fees. Just be sure to remember, a credit card is the bank’s money. They are loaning you money with the expectation that you will be paying it back. For most credit cards, you have a 30 cycle, a 21-day grace period and of course fees.

Here’s an example.

You have a $1000 basic credit card with a 19.99% interest rate.

One statement is between January 1st and February 1st. All your purchases between this time will show up on your first statement bill. Once you receive your printed statement, on February 2nd, you’ll see your purchase balance, let’s say $500, your minimum payment which is usually $10 (+ any additional fees) giving you a full statement balance of $510. The bank gives you a 21-day grace period so if you pay your $510 balance (balance + fees) before the statement is due (February 23) then you won’t have to pay any interest on your purchases. This is a deal.

19.99 (interest rate) / 100 / 365 days x 500 (Average Daily Balance)

Now let’s say for whatever reason you were not able to pay the entire balance before February 23rd so you just pay your minimum, $10.00. This is fine, as paying the minimum keeps your account in good standing with the bank and your credit history. Just note, you will be charged an interest fee for every day you were carrying a balance (31 days of your statement period) for not returning the bank’s money in full.

How To Calculate Interest:

Interest rate / 100 / 365 Days x Average Daily Balance = Interest Charge

Let’s plug-in those numbers:

19.99 / 100 / 365 x 500 = 8.48

You’ll see an interest charge of about $8.48 for your $500 balance.

So by this logic, if you don’t make any other purchases in the month of February, your next bill that will be due on March 23 would be $518.48 (did you forget that 10$ minimum?). You can see how your payment has now basically doubled.

Let’s say you paid your minimum, which is now 18.48 (10$ plus any additional fees), and you spent another 200 in February. When your statement is due March 23, you’ll see a bill of around you’ll see an interest charge of 11.88 + your 10$ minimum. Your bill will now be 721.88. That escalated quickly.

Keep this up for let’s say a year, and you’ll rake up a bill of a few hundred dollars without even touching the principal; the original amount you started off with. Don’t get caught up with paying the minimum, it will always be there. You want to focus your energy on lessening the Average Daily Balance (the balance of your card during a given month).

See How To Pay Down Your Debt

When you finally pay off your bill in full, you will see what is called residual interest on your April 23rd bill. This is the interest you owe for basically being late on your January, February and March bill since you did not give the bank back its money.

You’ll likely see a $5 charge on your next statement.

Managing your money starts with the financial habits you make. Make it a habit to keep up with your statement cycles and bill dates to ensure you never miss a payment, keep a budget to make sure you are spending what you can actually afford, and pay off your cards in full.