With the global credit crunch being felt most strongly here at home, there’s no easier way to wrap your head around it than to get a basic idea of how compound interest works, especially as compared to simple interest. Compound interest is what causes some loan recipients to owe substantially more than they borrowed, and some people to earn way more than they invested.
Compound interest is interest upon interest, the very machine that spurs the creation of global capital. Compound interest is a great boon when you’re saving money in retirement funds, and earning returns on returns, but when you’re paying interest, it’s trouble time.
Let’s take this example – you charge $50 on your credit card to buy a nice Gregory Barnes shirt for father’s day. The bill arrives shortly thereafter, and you pay the minimum amount, which is 2%, in this case, $1. Only making the minimum payments every month, it will take you 82 months and $82 to pay off a $50 shirt. 82 months later, you’re not even going to remember buying that Gregory Barnes shirt, and you’ll probably also be oblivious to the fact that you ended up paying $32 more than what it retailed for.
The average American family owes more than $5,000 on their prime credit card, and at 15% or 16% interest (a conservative rate, most cards are now at 18%), they will be paying between $800 and $900 in interest on that principle $5,000. Had they taken the money that they spent on interest, and invested it in an investment that gave an 8% return, they would have $100,000 plus after only three years. Yes, investing yourself is the wise way to go.
But if you want to be able to raise capital quickly, you’re going to have to have some sort of credit rating, and that means that they’ll be looking at your credit report to determine the interest rates on loans, security clearance for certain jobs, whether an apartment will be rented to you. They do so by using your credit report to create a credit score, a method created by a company called Fair, Isaac & Co. The number is called an FICO score. Nobody knows exactly how a credit score, or FICO score, is determined, but there are some basic principles – first, paying bills on time and not maxing out credit are important indicators that will lead to a positive and higher credit score.
Smart Tactics To Take On Consumer Debt
A smart approach to credit is to think of consumer debt as the most nefarious, terrible and awful thing to have about, an albatross around your neck, and you’re the Ancient Mariner. Pay it off as quickly as you possibly can – whether it’s credit card debt, auto loan debt, personal loans. Paying off consumer debt will allow you to push capital towards better areas – saving for retirement, or planning for financial disasters.
Make a list of all of your acquired debt on a sheet, and rank them according to their interest rate. The debt with the highest rate of interest you should pay off immediately, while paying minimums on the rest, and then pay off the next highest debt using the same amount you were able to afford from your budget. If you’re a customer in good standing, you can generally negotiate with your credit card company to lower your interest rates or to waive the annual fees you pay on your credit cards. You should also carefully examine all your statements for fraudulent additions, incorrect charges, or any movement on the part of the credit company to change your agreement. By using the card and not objecting, you’ve given what John Stuart Mill would call tacit approval to the new fees and charges.
