Credit cards and debt

Two colleagues get the same credit card in the same week. Same bank, same limit, same 22% interest rate.

Kostas uses his for everything: groceries, flights, the dentist. On the 28th of every month, the full balance leaves his current account automatically. He never thinks about it. Over the years the card costs him nothing. Once, when an airline collapsed with his booking, the card company refunded the ticket.

Anna uses hers the same way, with one difference. One tight month, she pays the minimum instead of the full balance. The next month the balance is bigger, so the minimum feels even more reasonable. She now carries €3,000 from month to month. If she keeps paying only the minimum, that €3,000 will take almost nineteen years to clear and will cost her €5,963 in interest, about twice the debt itself.

Same card. Same rate. Same salary, roughly. The entire difference is one habit, and that habit is the headline of this whole article.

Pay the balance in full. Every month. No exceptions.

A credit card has exactly two modes, and they are so different they should have different names.

In mode one, you pay the statement balance in full by the due date. Cards come with a grace period: as long as you clear the whole balance on time, purchases cost you 0% interest. You are borrowing the bank's money for a few weeks, free, and collecting the card's protections on top. In this mode a card is a genuinely useful tool.

In mode two, you pay anything less than the full balance. The unpaid part "revolves": it rolls into next month, interest starts running on it, and on many cards the grace period disappears, so even new purchases start accruing interest from day one. The rate that kicks in is the APR, the annual percentage rate, which on credit cards commonly sits between 18% and 25%. For comparison, that is roughly triple what a bank charges for a mortgage.

The rule, then, is short enough to be a habit: pay the full statement balance, every single month, ideally by automatic direct debit so no tight week can talk you out of it. If you cannot pay the balance in full, that is not a card problem, it is a spending signal, and the fix lives in your spending plan, not in your card settings.

Compounding, with the sign flipped

You will meet compounding later in this series as the quiet engine that builds wealth: money earns interest, the interest earns interest, and the curve bends upward. That article is the bright side of this same force. A credit-card balance is the identical mechanism running against you. Unpaid interest joins the balance, and next month's interest is charged on the interest. The curve bends the same way. You are just standing on the wrong side of it.

Watch it in slow motion. Anna owes €3,000 at 22% APR. Her card sets the minimum payment at 2.5% of the balance, with a €25 floor, a common formula. In her first month, interest adds €55. Her minimum payment is €76. So of the €76 she pays, €55 goes to interest and only about €21 touches the actual debt. And because the minimum is a percentage of the balance, it shrinks as the balance shrinks, which stretches the repayment out for years. That is not an accident of the arithmetic. It is the product working as designed.

Here is the full picture, computed from those assumptions:

Read the first row once more. The minimum payment is not a repayment plan. It is the slowest legal speed, priced so that the journey costs twice the distance.

Those four rows are one balance at one rate. Your own card's numbers, any balance, rate, and payment, run through the same arithmetic in the free debt calculator, month by month, including where each payment actually goes.

"Good" debt, "bad" debt, and other slippery labels

You have probably heard the tidy version: mortgages and student loans are "good" debt, cards are "bad" debt. The tidy version is half right and half trap, because it judges the label instead of the loan.

A mortgage is called good debt because it buys an asset that tends to hold value while you use it. But a mortgage at the wrong price is bad debt with paperwork: buy an overpriced flat with a thin deposit at a stretch, and you have bought bad debt in a good costume. Plenty of people learned this in 2008. A study loan can be excellent debt when it buys skills that raise your earnings for decades, and poor debt when it buys a credential that changes nothing about what you can charge for your time.

So drop the labels and ask two questions of any loan, existing or proposed:

1. What does it buy? An asset that holds value or raises your earning power sits on one end. Consumption that is already gone, dinners, gadgets, holidays, sits on the other.
2. What does it cost? The rate, the term, and the total interest in euros over the loan's life. Not the monthly payment, which is designed to feel small. The total.

A card balance fails both questions at once: it usually financed consumption, and it costs 20-something percent. That is why it goes first in any cleanup.

Already in debt: the order of attack

If you are carrying debt now, skip the shame and go straight to logistics. Step one is the same in every method: write down every debt you have, on one page, with three columns: who you owe, the balance, and the interest rate. Include the embarrassing ones. A debt you refuse to look at still charges interest.

Then pay the minimum on everything, put every spare euro on one target debt, and choose the target by one of two methods:

• Avalanche: target the highest interest rate first. Mathematically best: every euro attacks the most expensive debt you have.
• Snowball: target the smallest balance first. Psychologically best: you clear a whole debt quickly, and a crossed-out line is fuel.

How different are they really? Take someone with three debts: a €900 leftover phone-plan loan at 5%, a €3,000 card balance at 22%, and a €5,000 personal loan at 10%. They can put €350 a month toward debt, with €25 minimums on each. Computed out:

Same finish line, €179 apart over two and a half years. The avalanche is genuinely cheaper, and with bigger balances or wider rate gaps the difference grows. But €179 is also a fair price for a method you will actually sustain, and research on debt repayment (and every gym membership ever sold) says visible early wins keep people going. So here is the honest ruling: if spreadsheets motivate you, run the avalanche. If crossing things out motivates you, run the snowball and do not let anyone make you feel irrational about €179. The only wrong choice is the third one, where you keep researching methods instead of paying.

What a card is genuinely good for, and how it baits you

None of this is an argument against credit cards. Used in mode one, they do real work:

• Fraud isolation. When a stolen card number gets used, the thief is spending the bank's money, not the money your rent comes from, and the dispute happens while your current account sits untouched. A debit card offers no such moat.
• Purchase protection. Card networks offer chargeback rights: when a seller never delivers or goes bust, you can dispute the charge and often get the money back, as Kostas did with his airline.
• Credit history. Years of on-time, paid-in-full card use is evidence you handle borrowing well, and that evidence gets cheaper mortgages later.

And here is where the same product baits you:

• The minimum payment, engineered to feel responsible while stretching €3,000 into nineteen years.
• Revolving credit itself, the design where the balance never has a finish date unless you impose one.
• Buy-now-pay-later, the card's fast-growing cousin. Splitting a €120 purchase into four payments feels harmless, and each one is. The bait is accumulation: six harmless plans at once is a €200 monthly obligation nobody decided to take on, with late fees waiting behind any slip. Treat BNPL as what it is, consumer debt with better branding.

The pattern is consistent: the card rewards you when you pay in full and profits from you the moment you stop. Know which side of that trade you are on before you tap.

Credit scores in two minutes

A credit score is a running record of how you have handled borrowing, compressed into a number that strangers use to decide whether to trust you with more. Lenders check it before a mortgage or a car loan. Landlords increasingly check it before renting to you. Utilities, phone carriers, and in some countries even employers may look.

What moves it up is boringly consistent: paying on time, every time; using only a modest share of the credit you have available; and keeping accounts open long enough to build history. What drags it down: missed or late payments, maxed-out cards, and a burst of credit applications in a short window, which reads as desperation. Notice that the up list is just mode one from the top of this article. Pay in full, on time, forever, and your score largely takes care of itself.

Do this now

One page, this week: list every debt you have, with the balance, the interest rate, and the minimum payment. Cards, loans, BNPL plans, the money your brother lent you. Sorting them can wait until next week. This week you only have to look, because a debt list you can see is a plan waiting to happen, and a debt list you avoid is compounding in the dark. If you have no debt at all, take the five minutes anyway and switch your credit card to automatic full-balance repayment. That single setting makes mode two impossible.

Next in the series: How banks actually work, what really happens to your money after you deposit it, and why your bank is not a vault.