8 Fun in the sun! Mia went on spring break and charged $1,500 on a credit card with a 19% interest rate. When she got the credit card bill, she paid the minimum—and since she didn’t have a lot of extra money, she continued to just pay the minimum. If she pays only the minimum amount each month (say 4% of the outstanding balance), it will take her more than SEVEN YEARS to pay off the debt! And she will end up paying a total of almost $2,400—approximately $900 EXTRA IN INTEREST. There's a credit limit Every credit card holder has a credit limit (the maximum amount he/she can charge). A credit card will be rejected when a person reaches his/her limit, which is about $800 for the average first-time credit card user. This is called “maxing out” your card—a nice safeguard against overspending. Some people, however, do not let a maxed out credit card stop them from making additional purchases. They use a second card—or a third, fourth, or fifth card. They buy more and more stuff, max out multiple cards, and accrue more and more debt. It’s a formula for financial disaster. We pay interest on the interest? When you don’t pay the entire balance on your credit card, you're charged interest (generally 10% – 20%) on the unpaid balance. The following month you will again be charged interest on the unpaid balance, and also on the prior month’s interest. So now you are paying interest on the interest. This is called compounding interest. And this is why when you only pay the min- imum amount each month (which credit card companies love you to do), it takes a long, long time to pay off the balance. This is how a $300 TV turns into a $500 TV.