Do you pay your credit card debts on time?
According to 2019 Gallup poll, the average American owes $2900 in credit card debt. Usually you are granted with a grace period, which is about 20 ton 50 days. During that period of time, your interest of purchase won’t be charged if you pay your entire balance on time.
However, if you don’t pay the entire balance or pay it overtime, the interest charges will appear on the next statement. Also, if you cash out or make a balance transfer, separate interest rate is applied. That’s the way banks and companies make money from credit cards.
Interest can be seen as a rental for the borrower for the use of an asset. Before you apply for your credit card, you will be noted the Annual Percentage Rate of this card. An APR is the yearly interest you have to pay for the money you borrow.
You can calculate your daily interest rate according to APR. For example, if you have an APR of 15%, then the daily interest rate will be 15%÷365=0.041%.
Suppose Jack has a credit card, and the APR is 15%. We can know that its daily rate is 0.041%. Now Jack has a balance of $1000. For the first day, the interest is $0.41. If simple interest is applied here, one month later, the total interest would be $0.41×30=$12.3.
However, this is not the way banks calculate interest. They apply compound interest. Compound interest means that all the interest of previous periods will be added to the principal. In Jack’s case, if compound interest is applied, the next day, when adding the interest, his balance would be $1000.41. Now we can calculate the interest for the second day, which is $1000.41×0.041%=0.41016, and the balance for the third day would be $1000.41+$0.41016=$1000.82016. By calculating, at the end of this month, the total balance would be $1012.37 and the interest is $12.37.
Some of you may not see this a big difference between simple interest and compound interest. But if you wait long enough, compound interest will show you its power.
Here’s the chart showing you the big difference of the amount of interest.
This is the power of compound interest. So, pay for your credit card debt on time and don’t let the compound interest ruin your life.
Compound interest can also be applied on investment. Warren Buffett expressed his investment idea, “Life’s like a snowball. The important thing is finding wet snow and a really long hill.” Wet snow refers to your principal and the long hill means enough time. If we give us a long period of time and enough patient while investing, the compound interest will show you its amazing magic.