Interest Is Calculated And Added, At Certain Time, Generally Intervals- Monthly, Six- Monthly, Annually

Category: Finance, Credit.

A question that vexes math students and teachers alike- "How does this apply to the rest of my life? " - turns out to have some surprising answers.

Statistics in your ledger? Geometry in the living room? Yes, and yes. There are probably 2 or 3 in your pocket right now. Credit cards are ubiquitous in American life. As of 2004, Americans were toting 3 billion total credit cards, and most of those cards users were feeling the pinch- by the early part of this decade, average credit card debt for individuals had soared to over$ 11, 00During the same period, credit card companies lowered minimum payments so far that, it may take, for example a cardholder 32 years to pay off a simple$ 5000 balance at 15% interest.

In these times, it s absolutely critical to understand how compound interest works if you don t want to be stuck with out- of- control debt. That s a scary figure. However, many of us were absent that day in ninth- grade math class, so here s a refresher. "Interest" is, in effect, money that you pay- or someone pays you- for the privilege of borrowing money. Interest is calculated and added, at certain time, generally intervals- monthly, six- monthly, annually. When you put money in a savings account, the bank pays you a small amount of interest for the privilege of borrowing your money, and it works the same way when you" borrow" $50 from your credit- card company to buy, that new season, say of Battlestar: Galactica on DVD. (Hey, I can relate. ) So let s say you put$ 100 in a savings account at a bank that offers an interest rate of 1% . Let s say your interest is calculated annually- this means that at the end of the year your$ 100 in savings will contain your original$ 100, plus an amount of money equal to the principal( $100) multiplied by that interest rate of 1% . Compound interest is a little more, interesting, well- it can make you a lot more money if you re the one receiving the interest, and it can hurt you a lot more if you re the one paying out.

Percentages can also be expressed as decimals: 1% interest, would be, for example. 00100 times. 001 is 1, and that s the amount of" interest" you ve gained: $Add that to your original balance: you now have a whopping$ 10If you d given your money to a bank that offered a slightly higher interest rate- say, 3- you d be doing a bit better: 100 times. 003 is$ 3, which added to that original$ 100 is$ 10 That s simple interest. With compound interest, the money you earn in interest is added to the principal, so it s also gaining interest. This is why even a small credit card balance tends to spiral out of control. Let s say you spend$ 100 on a credit card that charges monthly 20% compound interest. (What a wonderful world that would be! ) If interest is figured monthly, then at the end of the first month you just owe$ 12 At the end of the second month that$ 120 is the principal from which interest is calculated- so now the amount of interest you owe isn t$ 20 as before, but 120 times. 2, i. e. $12At the end of the third month, interest is calculated again on that$ 124- you owe$ 28 in interest, but the credit card company rounds up, so$ 25 in interest is added, and next month you ll be paying interest on a whopping$ 149 debt. And since companies have used low monthly payments to lure in new customers who don t understand how compound interest works- it becomes easier and easier for a small debt of$ 2000- 5000 to become an onerous twenty- or thirty- year burden. (Many consumers don t realize that this is how the system is designed to work- the longer you re paying off that little balance, the more interest the company makes. Indeed, the responsible card, in the industry users who keep balances small and pay them off quickly are sometimes derogatorily referred to as" deadbeats. ") But with a little understanding of compound interest- and a little discipline, yes, and, a little luck( no sudden financial emergencies of the kind no one can plan for) you, can join the, too ranks of these" deadbeats" who refuse to be victims of the law of compound interest.