8 Fun in the sun! Suppose you go on spring break with friends, and you charge $1,500 on a credit card with a 19% interest rate. When you get the credit card bill, you pay the minimum—and since you don't have a lot of extra money, you continue to just pay the minimum. If you repay only the minimum amount each month, and your minimum is 4% of the outstanding balance, it will take you more than seven years to pay off the debt! And you 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 you 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. You 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 be charged interest 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 minimum amount each month (which credit card companies love you to do), it will take you a long time to pay off the balance.