Sunday, November 1, 2015

When Compound Interest Can Really Hurt You

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” ~ Albert Einstein

Nothing can be more true than this quote from Albert Einstein. I'm sure when most people think about compound interest, they think about how it can work in their favor, for instance, in a savings or investment account. However, most people don't realize the incredible power of compound interest and how much it can also work against them, especially with their DEBT.

And the banks and credit card companies sure aren't making things any easier. As a matter of fact, the average APR on retail credit cards continues to rise and now sits at 23.43% (up from 23.23% in 2014), according to a new report from CreditCards.com.

For instance, if you start with a $500 balance on your credit card at 19.8% interest, then each year make two additional charges of $75 each, and pay only the minimum monthly payment of 3.5% of the balance or $20, whichever is greater, after 25 years the interest charges amount to $3,121. And after 25 years, you will still have a balance of $624!

This reminds me of a cartoon by Randy Glasbergen where a boy asks his father, "What's a credit card?" and the father answers, "A credit card is what you use when something costs too much, and you want to pay more for it." Funny, but true!

So, the first step to reversing this trend and having compound interest work for you is to not only pay down your debt, but to completely eliminate it. A smart strategy for taking control back and eliminating debt sooner is to pay a fixed amount every month as opposed to just paying the minimum. For more details on this strategy you can compare “Revolving” vs. “Fixed” Credit Card Payment Plans.

Then once you have your debt under control you can really take advantage of the power of compound interest. But, to make sure your hard-earned money is working harder for you than for someone else you will also want to read You Work Hard For Your Money and Your Money Should Be Working Hard … FOR YOU!

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any comments, please post them below, otherwise, feel free to contact me.
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