Help! Why Is My Credit Card Balance Not Going Down?!
Help! Why is my credit card balance not going down?!
Understanding Compound Interest and How it Impacts Your Credit Card Balance
Each month I make my credit card payments faithfully. I am never late, yet my balances are not going down. It is very frustrating to see that my payments are barely making a dent. Can you explain why this is happening?
What you are describing is referred to as compound interest. Compound interest is not an easy concept, and one that can be very costly. Compound interest is the interest charge that is added to the principal so that your balance grows.
For example, if you have $5,000 worth of debt and your account accrues 10% interest each month, on the first month you will be charged $500 in interest ($5,000 x 10% =$500). In month two your balance is $5,500 ($5,000 + $500), and you are charged your monthly 10% interest, so now your balance is $6,050.00 ($5,500 x 10%). These numbers are high, but this is an example of how quickly your balance can grow as a result of compound interest.
In most cases, interest on credit cards compounds daily. In our scenario the interest would be .027% (10% / 356 days). Our balance would begin at $5,000. On day one we would be charged $1.35, which brings our balance to $5,001.35. On day two our balance would be $5,002.70 because we were charged another .027% on $5,001.35. Compound interest is one major reason to pay more than your minimum payment each month to your creditors.
There can also be a benefit to compound interest. When you have your money in a bank account, the bank will pay you compound interest. It works exactly the same as the examples given above; however, the interest rates tend to be lower. It is always in your best interest to be the recipient of compound interest as opposed to the payee.
As I stated before, compound interest can be complicated. If you are struggling with the formula or how it is impacting your accounts, please reach out to our certified credit counselors at 1-800-992-4557. They will be happy to analyze your account and give you a personal explanation of how the interest is accruing on your accounts. Or click here for more ways we can help.
Kim Cole is the Education Outreach Coordinator for Navicore Solutions. Kim provides financial education workshops and seminars to communities. Readers can submit general questions relating to personal finance, credit scoring, debt management, student loans, home finance or bankruptcy which may be highlighted in the next month's edition. All identifying information will be kept anonymous.
Please send your questions via email to DearKim@navicoresolutions.org