The Sneaky Way Credit Card Companies Get You to Pay a Ton of Interest

That interest can really add up.

Credit card companies don't just give out rewards and cash back out of the goodness of their hearts, nor do they extend lines of credit to consumers to be nice. Rather, credit card companies are in the business of making money. And they tend to make a lot of it by charging not only various fees, but interest on carried balances.

Any time you fail to pay off a credit card bill in full, your balance starts to accrue interest. However, the way credit card companies compound interest commonly makes it very expensive for consumers, and that's something you should know about.

How credit card interest works

You may be familiar with the concept of interest in the context of a savings account. If you keep your money in the bank, you'll earn a certain rate of interest on it. And your bank might compound interest on a daily basis or a monthly one, depending on the terms of your account.

Bank account interest is a good thing, because that money gets added to your account. Credit card interest is a bad thing, because that's interest you have to pay.

Meanwhile, it's very common for credit card companies to compound interest on a daily basis. What that means is that for each day you carry a credit card balance, it costs a little more.

Let's imagine you start out owing $1,000 on a credit card because you couldn't pay your balance in time. Your balance might climb to $1,003 the next day because you accrue interest on it. But then, your credit card company might calculate the next day's interest on $1,003, not just your original $1,000. So by then, you may be up to $1,006. And then the day after that, your credit card company might compound your interest on $1,006, and so forth.

That's why credit card balances can be such a dangerous thing. Because of the rate at which interest is usually compounded, a smaller balance can easily grow into a larger one if it takes you a while to pay it off. That's why it's best to avoid carrying a balance in the first place.

How to avoid credit card interest

Don't like the idea of paying interest to your credit card company? Don't carry a balance forward. And one way to help ensure that you're able to pay your credit card bills in full every month is to stick to a spending budget.

Map out your various expense categories and make sure your total spending for the month does not exceed what you bring home in your paychecks. Doing so could help ensure you're able to pay off your credit cards every month in full.

At the same time, it's a good idea to track your credit card balances on a weekly basis. Some might argue that's overkill, but if you see a higher balance than what you're comfortable with by mid-month, it might trigger a warning to cut back on spending for the remainder of the month so you can pay off your bill in full.

All told, credit card companies are in the business of making money -- by taking it away from you. Be mindful of that as you charge expenses on your credit cards so you don't wind up making their job easier than it needs to be.