Financial Planning -> Save Money -> Credit Cards & Compound Interest
How Compound Interest Can Work Against You
The use of credit cards would be an example of how someone can easily get into financial trouble. If the balance of your credit card is paid off completely by the due date each month, there is no problem, because there is no interest charged. By doing this, you also establish a good credit history for yourself.
If you only make a partial payment (such as the minimum payment due), the credit card company goes back to the purchase date to start charging you interest. Credit card interest rates are very high, so the balance owing can increase quickly. If you fall behind in your monthly payments, you will be paying compound interest, which is interest on your interest.
Once you get to this point, you are in serious financial difficulty, and you should take steps to correct the situation immediately. If you don't act quickly, your situation just gets worse and worse. Some remedies:
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Sometimes credit card companies will offer clients the opportunity to skip a monthly payment. However, they will continue to charge you high interest rates during this time. Do not skip a payment.
Use Loan and Mortgage Calculator to see how much faster you can pay off your credit card debt by increasing your monthly payment.
For more information on credit cards see the Financial Consumer Agency of Canada website.
Tip: Pay off the balance of your credit card each and every month. If you cannot do this, you are in financial difficulty, because you cannot afford what you are buying, and you are paying high interest rates on your purchases.
Revised: May 23, 2018