Although compound interest sounds like a dream come true, I mean who doesn’t like “free” money? When compound interest is applied to debt it can have a severely negative effect, making a bad situation even worse.
Credit cards are a common way to finance debt, however, they typically come with high-interest rates. If a significant credit card balance is allowed to compound, it can mean paying back thousands more than what you borrowed.
Borrowing £10,000 on a credit card with a 20% annual interest rate.
- If this is left to compound over 5 years it becomes £27,000
- If it is left for 10 years the£10,000 becomes £72,000!
Oh boy! That’s a lot of debt.