Christmas and Compound Interest

Posted By on January 1, 2017

In the true spirit of Christmas we have given gifts, with good will, to friends and family. However, it might surprise you to know the most expensive gift you probably gave this Christmas, was to neither friends nor family.  In fact it was to some faceless people already wealthy, who know you only as a number. uncaring, devoid of any compassion or milk of kindness and you didn’t even have them on your Christmas list.

Every year when Christmas comes around, we spend up large, usually more than we have saved. The extra money comes from our credit card account. According to last years statistics, every person in Australia owes just over $3073 in credit debt. That’s not including any credit debt that will be paid off before it accrues interest. Many people will repay that debt at the minimum rate their credit cards publish and there lays the trap. The minimum payment amount will pay the interest and reduce the balance by around 2% to 3%. (Originally it was only 1% but the government made the credit card companies increase their minimum payment amount). What people don’t realise is the effect of compounding interest on their credit balance and how much they will actually end up repaying.

For example, let’s assume we have a credit card with an interest rate of 17.31%, with a credit account balance of $3,073.00. If we paid the minimum payment, we would pay only $62.00 a month. By the time the account was repaid in full, in 24 years time, we would have paid back an extra $6,000 in interest. Effectively we gave the credit providers a gift not only for this Christmas but for the nest 23 years!

If we had added another $50 a month to that minimum payment, the credit card account would be repaid in 3 years and we would have paid only $867.00 in interest, saving $5,133.00.

We tend to think that the minimum payment is what we should pay off our credit card and of course that’s what the finance companies want us to think because it makes them a fortune.

If you really want to get into the spirit of Christmas, add a bit extra onto your credit card repayments and give something to those who deserve it most – yourself. After all you earned it, in every sense of the word.

About The Author is the online voice of a collection of consumer advocates working independently to represent people who would otherwise be unheard. We speak for those who are bullied by corporations and don't realise they can have a say.


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