Dave Ramsey Said This Credit Card Feature ‘Straight up Sucks’

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

If you have a credit card, you need to read this. 

Finance expert Dave Ramsey is not a big fan of credit cards — to put it mildly. In fact, Ramsey recommends not using cards at all, despite the benefits they can provide (including generous rewards and the ability to boost your credit score). Ramsey recommends opting for cash instead, and using the debit card that comes with your bank account in place of a credit card.

There’s a lot Ramsey doesn’t like about credit cards, but there’s one feature in particular he says “straight up sucks.” And it’s a feature that every cardholder needs to be aware of.

Ramsey’s right that this credit card feature can be bad news

The credit card feature Ramsey warns about relates to how interest is charged on your cards.

“Most credit card companies use compound interest to determine daily charges — which is basically interest on the interest you’ve already racked up,” Ramsey explained. “And listen, we like compound interest when it helps grow your investments. But it straight-up sucks when it’s being used against you.”

To understand how compound interest works, and why it can be so costly, consider a simple example. Let’s say you owe $5,000 on a credit card with a 17% annual interest rate, and interest compounds daily. At the end of one day, you’ll have been charged $2.33 in interest. That would be added to your balance so on day two, you’d be charged interest on $5,002.33.

Each day, your balance would grow a little bit, and you’d find yourself paying more interest that is tacked onto your balance. Understandably, Dave Ramsey is not a fan of this feature because it means even if you stop charging purchases on your card, your balance can still grow and your interest costs can still increase.

What can you do about it?

Dave Ramsey is right; compound interest does suck, to borrow his expression. But it isn’t necessarily something every credit card user has to worry about.

See, if you pay off your credit card balance in full by the payment due date when you receive your statement, you won’t pay any interest at all. You just pay back the money you actually charged on your card without any interest charges being assessed.

If you can pay off your balance in full, you get the benefits that come with a credit card like the points, miles, or cash back many card companies offer. But you don’t have to pay this additional charge that card companies tack on for people who carry a balance.

The trick is to make sure you actually do pay off your cards. You can do this by living on a budget, tracking your spending, and making sure you don’t charge more on your cards than you’ll have available in your bank account when your statement comes. This can seem daunting at first, but once you get in the swing of sticking to spending limits on your card, it should be doable.

If you already have credit card debt you’re struggling to repay and you are worried about this unpleasant feature on your cards, you also have options. Consider a balance transfer or debt refinancing using a personal loan to see if you can reduce the interest you’re paying and to make debt payoff easier.

Top credit card wipes out interest until 2024

If you have credit card debt, transferring it to this top balance transfer card secures you a 0% intro APR for up to 21 months! Plus, you’ll pay no annual fee. Those are just a few reasons why our experts rate this card as a top pick to help get control of your debt. Read our full review for free and apply in just 2 minutes.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More