Compounding interestNowadays, you can have what your heart desires with just a swipe of your credit card.  Everything just got easier with the use of credit cards and people get more and more dependent on it. The sad thing about it is that many have fallen into the trap of not being able to recover from credit cards. Most of them are surprised on how they came about owning that debt as when compared to what they purchased, it doesn’t add up. That is because of the deceiving credit card interest that many consumers are not aware off.

Those who understand interest earn it and those who don’t, pay it. This is a fact. Unfortunately, not everybody is even interested in how compounding interest works. Some may seem aware but does not fully understand the damage it brings to their financial situation. Most would just worry about having a good working credit card and charge the purchases on it without even considering how much they will pay for the interest itself. This adds up to the mounting debt for many. To add, credit card companies even offer enticing offers to keep you spending so that they could earn more from the interest of the money that you owe.

Credit card companies earn not only from the monthly or yearly renewal fees but they earn big time with compounding interest. This is why many banks would extend credit cards to almost anyone who needs it. It’s an easy way to earn and get money. Let me try to explain how it works,  compound interest is the interest being added to the principal money that is owed  in such a way that the principal money that you owe is growing as well.  For example, you owe the credit card company $1000 dollars with 1% compounded interest monthly. By the end of the first month you will owe them $1010 dollars. However the succeeding month you will owe them $1020.1 because they will compute the interest rate at 1% from the money owed on the first month which is $1010 instead of the original amount owed that is $1000 dollars.

This may seem like a small amount of money for some, but over time, and the longer you pay your debt, the more money you will owe.  Not only is the interest growing but the principal money owed itself is growing, resulting to a mounting amount of debt. There will even come a time that you are paying double the amount of what you originally owed and to make matters worst, it becomes the principal amount of money owed. That’s why many financial experts would say to pay in cash instead to avoid accumulating credit card interest. Look at it this way; if you saved that money on a bank account instead of paying for interest, then you will earn more rather than losing it to the credit card company.

There are times that it is really unavoidable to use credit card instead of debit card and cash. If this is the case, the best thing you could do is understand which credit card has the highest interest rate and avoid using it. Use the credit cards with better deals and pay off the debt early to avoid it from getting bigger. There are many companies out there who can help you be on the way to financial recovery. Look for it and enjoy financial freedom.

A great way to get your interest rate down on the credit cards is simply call the banks (weekends are good, they’re not busy) and ask them to lower the interest rate. You never know. 

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