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Compound Interest Works for the Lender (Not You)

When you use credit and don’t pay off the entire amount by the initial due date, you are setting yourself up to pay compound interest. Here’s a very simple example showing how it works: Compound Interest Calculation

You can see how adding the interest back to the balance and then charging interest on that new balance can add up quickly. Of course, this is very oversimplified. No payments are made in this example, so the balance continues to rise. In the real world, you would make payments so the balance would decrease. It's important to make sure you know what your lender is charging and over what period. 

Making Only Minimum Payments

Calculator

Use this calculator to figure out what you will end up paying in interest and how long it will take you to pay off a loan when you make only minimum payments on your credit card debts. Use the figures from your credit card(s) for balance, APR and minimum payment percentage:

  • To see how long it would take you to pay off your debt paying only the minimum each month. 
  • To calculate what you really can afford to pay based on your budget.

Consequences of Not Paying On Time 

Alarm clockFalling behind or missing loan payments can have serious effects. The consequences of delinquent accounts start with simple late charges, but eventually can lead to long-term problems. When you do not pay a bill, you might experience:

  • Fees for late payment(s).
  • Potential damage to your credit history, making future borrowing tougher and more expensive.
  • Being denied credit or sent to collections.
  • Having your wages garnished or items repossessed to repay your debt.
  • Added stress and decline in overall well-being.

Authorized User vs. Joint Account Holder

When you allow someone else to be an authorized user on your credit card account, you are letting them use the account without any legal accountability to pay back the debt. If that credit card account went into default, the authorized user would not be responsible. However, if you make someone else a joint account holder, then both you and that person are equally responsible for the debt. If the account goes into default, a joint account holder is just as accountable to pay it back as you are.


How Well Do You Know Borrowing Terms?

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  Drag the term over the definition.

Interest

Fees

Finance Charges

Authorized User

Joint Account Holder

Compound Interest
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A person who shares responsibility for payment with other users of the account and is legally liable for the balance due.
Joint Account Holder
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Additional charges you pay for using a line of credit or specific transactions such as cash advances, foreign transactions, balance transfers, and penalties for late payments.
Fees
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Someone who can use another person’s available credit, but who is not legally liable for the balance due.
Authorized User
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The total amount you pay to borrow, including the interest plus any fees for arranging the credit, if applicable. Also expressed as an annual percentage rate (APR).
Finance Charges
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What you pay a lender as compensation for borrowing money as a loan, credit card or line of credit. Calculated as either a fixed or variable rate, expressed as a percentage of the amount you borrow over a specific time period.
Interest
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The amount paid on the combined value of the original principal (balance) you owe and any interest that has been added to the principal.
Compound Interest
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