Credit Cards Are Loans

There’s something weird about the way we use credit cards. Most of the time, when we pay for items with credit cards, we don’t realize we’re that credit cards are loans.

Credit cards aren’t free money. Every time you use a credit card at a store or making a purchase online, you’re receiving a loan from a credit card issuer. If you’re lucky and your credit card comes from a credit union, you may only have 8% a year interest. But it’s more likely your loan for a cup of coffee or a new pair of shoes accumulates 15% interest each year, or even 25%.

Credit Cards Are Loans

When you pay for things with your credit card, you’re using something that’s called a “revolving line of credit.” These lines of credit are tricky–unless you pay them off each month, the balance on them keeps accumulating… and you pay more interest on the accumulated money. That can add up quickly.

This is really bad when you make lots of small purchases. If you each out at lunch eat day, let’s say you purchase a $7.99 burrito, a $1.79 soda, and a $3.99 side dish, you’ll be paying about $15 or so. When you pay cash, that comes out to $345 or so monthly for lunch.

But if you’re using a credit card with 25% APR, and don’t pay off your balance each month, you’ll be paying $440 for lunch that month. That means that instead of paying $15 for your lunch, you ended up paying $19 or so instead.

(Note to readers: We’re using fuzzy math here so we’re not getting mucked down in the pennys and cents. But you get the idea.

Yet… Credit Cards Have Their Uses

But here’s the tricky things: While credit cards are loans, and that includes all those messy things you imagine, they have a lot of benefits….

Many credit cards give cash back–anywhere from 1% to 5% a month of your purchases depending on the card and what you buy. Some card providers, like American Express and Bank of America, give substantial discounts to patronize certain stores, restaurants, and bars. If you travel, airline rewards credit cards can even get you free airfare.

There’s a moral to all this: Use your credit card wisely. Pay off your balance each month, or, even better, each week. Check up on your credit card’s website regularly, keep an eye out on transactions, and be a smart consumer.

Debt stinks, cash rules. So make sure you’re using your credit card like a champ.