Credit Cards: Compounding Misery

Compound interest is Dr. Jekyll in your savings and stock accounts, but Mr. Hyde when it comes to credit cards.  The same power of interest building on itself can skyrocket your credit card debt rather swiftly.

When a person dips their toe into their first unpaid balance on a credit card, it doesn’t seem like a big deal.  The shortage is usually for a good(ish) reason and the interest to be paid seems quite manageable.  But, if the payments made each month aren’t covering the accrued interest, then the debt will compound.  As the debt grows, so does the interest due each month. If you miss a payment, card companies may penalize you by raising your interest rates.  Things can quickly get out of hand.

Even if you’re heading in the right direction and paying down the principal, you usually have to first pay off the accrued interest each month, leaving only a small fraction of your payment going toward paying down your initial debt.  Hence, the sadly typical situation of a seemingly manageable credit card debt taking over 30 years to pay off when a person opts to only pay the minimum amount due.  Not quite a fool’s errand, but certainly foolish.

Want to see how this works out in a numerical example? Check out the bottom half of this article.

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