How Can Compound Interest Be A Disadvantage? - Anthony Norman


While compound interest can be a significant savings boost, it’s not all rainbows and roses. Compound interest is also the reason why you never seem to get your head above your credit card debt while making minimum payments.

Just as your savings balance grows when interest is compounding, so does the debt balance of what you owe.

When you make a credit card purchase or take out a personal loan, your lender will charge you interest, which is added to your balance. You’ll then be charged interest based on your new balance — the original amount plus the interest accrued (minus any payment you’ve made).

Compound interest can really hurt you in the case of negative amortization. That’s when your monthly payment is less than the interest that accrues over that period, and your outstanding balance increases instead of going down.

When you take out a loan or open a new credit card, here are four things to keep in mind:

  1. Score the lowest interest rate you can. Increasing your credit score will usually result in lenders offering you lower interest rates.

  2. Keep your lending period short. You’ll pay less interest with a three-year car loan than you will with a five-year loan.

  3. Pay more than the minimum. If you dig through your credit card statements, you’ll see a section that details how long it’d take to pay off your balance if you only made minimum payments and how much you’d pay in interest compared to what it’d take to pay your balance off in three years and how much you’d save.

  4. Make biweekly payments. You’ll end up putting more money toward your principal balance and pay less in interest by making payments on your debt every two weeks rather than once a month.

     

    ABOUT
    Anthony Norman, Swedish national born in 1974 is a serial entrepreneur mainly focusing in fintech, blockchain technology and IT. I have got 15 years of experience in financial market. What I am good at, and the reason why I’m here, is getting the right people, businesses and great ideas in a room together.

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