How The Compound Interest Monster Will Swallow Your Home

June 29, 2012 by  Filed under: Credit 

Handled carefully, compound interest could make you an awful lot of money. Done badly, this money monster could eat its way through your finances and leave you homeless.

What Is Compound Interest?

I’m going to explain this in a very simple way as I know that the ways the banks and loan companies phrase everything can be hard to decipher. Compound interest is the interest you pay on a loan or debt after interest has already been applied.

Here’s a quick example: let’s say you borrow $1,000. The compound interest for the year is 20% which means, if you pay nothing back, you’ll owe $1,200 at the end of the year. If you paid nothing on the loan in the second year your debt would increase to $1,440 (the 20% interest rate has been applied to both the initial loan and the first year’s accrued interest).

It looks kind-of painful and, when you get into larger loans, you really need to think about raising your pain threshold before you apply. In fact, you also need to have a good look at the overall health of your finances.

My Finances Are Bullet Proof

Are they? Zombies are bullet proof unless they take a headshot. Could your finances take a shot to the head and still be standing?

Even if you’re earning a good salary and you have few monthly outgoings you still need to do the math before you embark the sort of spending spree that would have Scrooge crying into his salty porridge!

Before we move on, I’d like to add that we’re talking about credit card funded spending. Whilst an online credit card calculator might appear to give you all the answers, you still need to do a little extra work and find out if you can really afford your debts.

Why Are We Only Looking At Credit Card Interest?

Because credit cards are one of the most easily abused form of lending available. Sure, payday loans are a touchy area for borrowers but the U.S law makers have deliberately controlled the amount of interest the lenders can apply.

Unlike payday loans, a credit card will keep on vomiting cash until you hit your credit limit. At this point, you need to work out how you’re going to pay it back.

How Bad Can It Really Be?

Really bad!

How many cards do you have? One? Two? Three? More?

Are you shifting your debt from card to another? How much compound interest are you adding every time you transfer you balance to a new card?

Take 10 minutes to sit down and work out how much worse off you’ll be if you carry on down this route. How many years will your debts take to pay off if you keep on subjecting them to compound interest?

The Calculator Site
The Calculator Site contains a series of finance calculators to help you with calculating savings, mortgages, credit card repayments and loans.

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