Credit cards are good and bad

You can use credit cards in one of two ways: using the credit facility to borrow money and carry a balance from month to month, or using them like debit cards and paying off your balance every month.

Dirty little secret

Nearly everyone knows by now that borrowing through credit cards is very expensive. You can probably get a consumer loan from your bank at an interest rate of 10%, while using a credit card with a relatively low interest rate of 14% (Annual Percentage Rate) has an effective annual rate of nearly 15% [=(1+14%/12)^12 - 1]. A card with a 24% APR has an effective cost of 27%.

Because the credit card companies make so much money from consumers, they market their product aggressively, and offer you balance transfers with 0% interest for 6 or even 12 months, all the while hoping that you will maintain or even increase your credit card balance, and start paying high interest rates after the initial teaser period.

The high interest rates on credit card debt are thus a tax on desperation – or stupidity.

On the other hand, paying off your balance in full every month and getting a cash back credit card is actually good for you and reduces your credit card taxes.