Compound Interest: The 8th Wonder of the World
By: Luis Maqueira
Broker & Co-Founder | Aleph Realty Corp
Is not what you know is what you don’t know that can hurt you!
Let me ask you. Do you know how interest is charged on a Credit card? On a Mortgage?
According to a Gallup poll, about half of American credit card users sometimes carry a balance on their cards. If you’re one of those millions of users, you’ve almost certainly noticed interest charges on your monthly card statement.
We need to learn how credit cards work, we need to prepare ourselves and our children for this financial burdens.
Interest “It’s really a fee for using someone else’s money,” explains Todd Christensen, director of education at Debt Reduction Services, nonprofit debt management and credit counseling organization in EEUU.
“Interest is like rent: The longer you pay interest, the more interest you pay — and at the very end, you get nothing back.”
Don’t this sound like your house rent? You rent, rent, rent and at the end, you get nothing back.
What is my Interest Rate?
Let’s say you have a credit card and an average daily purchase balance of $1,500 at the end of your 30-day billing cycle. You also have a variable purchase APR of 15.99%.
Here’s how to calculate your interest charge (numbers are approximate).
Divide your APR by the number of days in the year.
0.1599 / 365 = a 0.00044 daily periodic rate
Multiply the daily periodic rate by your average daily balance.
0.00044 x $1,500 = $0.66
Multiply this number by the number of days (30) in your billing cycle.
$0.66 x 30 = $19.80 interest charged for this billing cycle
The math requires some work, but the concept is simple: Carry a balance, and you’ll pay interest. The key term is Daily Balance, if you carry debt, there is no grace period. You are paying interest every day on your new purchases; even when you pay the full amount of the new purchases!
The important thing is to learn how to play the credit card interest game.
You cannot place your money in a checking account at 0% in the bank, and pay 29% APR or more in a credit card with a balance. That is a suicidal method of getting out of debt.
Credit Cards are an excellent tool. Why use them:
- They will help build your credit for the future purchase of a car or dream home.
- You do not have to carry cash. Cash can be lost or stolen.
- You can take advantage of the reward cashback or miles programs credit cards offer.
- You can budget your expenses.
When you pay with a credit card you have extra protection if you have a problem with the vendor. When you pay cash is more difficult to dispute.
Just learn the rules so you can use it on your favor, not on the bank interest.
How is the best way to Pay Credit Cards?
- Budget for it. Be smart using the money. Budget definition: an estimate of income and expenditure for a set period of time. Many times we misunderstand the word budget (expend less and save more). No; a budget is to know how to manage your money, so you can put it to work to the best use for you.
- Let’s pay less interest, transfer the balance to your low-interest credit cards, or let’s try to get $0 balance promotion on new credit cards.
- Use the time to your advantage, learn how to use billing cycles, due dates. The more days you have in a period of time, the more money you can put against your daily balance.
There is no magic formula to eliminate debt. The Principal needs to be paid in small steps; dollar by dollar. What we can show you are the strategies to pay less interest.
Join our workshops on First Time Home Buyers, we will help you improve your financial knowledge.
If you don’t tell your money what to do, someone else will use your money and will not be in your best interest, will be in theirs.
Aleph Team has one mission, to inform people, how to pay less interest. Family financial freedom is important and we can achieve this together with good financial habits.
Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment or financial advice and does not indicate the availability of any Aleph Realty product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.