Chapter 5 of 10All chapters
Chapter 5 of 10
Compounding against you
The same curve, inverted.
How debt grows
Unpaid interest joins the balance and earns interest of its own. A credit card at 20 percent compounding monthly effectively costs about 22 percent a year.
- Paying only the minimum can extend a balance for decades.
- Clearing high-rate debt is a guaranteed return equal to that rate.
Mortgages
Early payments are almost entirely interest, so overpaying early removes far more total cost than the same amount later. The effect surprises most borrowers.