Financial Planning -> Save Money -> Credit Cards & Compound Interest
How Compound Interest Can Work Against You
Pay The Whole Balance of Your Credit Card Monthly
The use of credit cards would be an example of how someone can easily get into financial trouble. If the balance of your credit card is paid off completely by the due date each month, there is no problem, because there is no interest charged. By doing this, you also establish a good credit history for yourself.
Partial Credit Card Payments Increase Debt Quickly
If you only make a partial payment (such as the minimum payment due), the credit card company goes back to the purchase date to start charging you interest. Credit card interest rates are very high, so the balance owing can increase quickly. If you fall behind in your monthly payments, you will be paying compound interest, which is interest on your interest.
Steps To Resolve Your Credit Card Debt
Once you get to this point, you are in serious financial difficulty, and you should take steps to correct the situation immediately. If you don't act quickly, your situation just gets worse and worse. Some remedies:
 | immediately stop spending on non-necessities |
| stop using credit cards |
| if the credit card debt cannot be paid off soon, get a bank loan (if possible) at a lower interest rate, and pay it off as fast as possible. |
Skipping Payments Is Not Good
Sometimes credit card companies will offer clients the opportunity to skip a monthly payment. However, they will continue to charge you high interest rates during this time. Do not skip a payment.
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Other Resources
For more information on credit cards see the Financial Consumer Agency of Canada website.
Tips:
Don't buy something on credit if you don't have the money to pay for it.
Pay off the balance of your credit card each and every month. If you cannot do this, you are in financial difficulty, because you cannot afford what you are buying, and you are paying high interest rates on your purchases.
Revised: October 26, 2023