Question:

Paying interest on interest?

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Say you owe £1000 on a credit card which charges interest monthly at a rate of 1.9% and you only make minimum 2% payment each month

So, month A you pay £20 leaving a balance of £980 and they add £19 bringing back your balance to £999.

Does the Credit Card company then charge 1.9% interest on £999 the next month? If so, isn't that charging interest on interest and is it allowed?

[these are not exact figures but an example based on my current situation with a leading Credit Card company]

yeah, you guessed, I'm trying to deal with debt - help gratefully accepted - please no lectures!

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5 ANSWERS


  1. Welcome to the real world. If you aint got it dont spend it.


  2. yep it's called compound interest i think.

    Credit cards suck when you owe money on them. It's cheaper in the longterm to get a normal loan to pay the credit card off.

  3. Yes, the interest charged on remaining balance is added to the balance payable which is the base for the computation of the interest expense.  That is how credit card companies make tons of money which is why it's really advisable to pay credit cards as soon as you can.

    Learn how to manage your credit:  http://www.happygodebtfree.com

  4. you ask ...please no lectures! ///yet that is exactly the thing you need ...how odd .

  5. *ALERT* never never NEVER only pay the min payment on credit cards. SOURCE: http://www.moneysavingexpert.com/cards/m...

    They're at such a level, that you will repay hundreds of times the amount you borrowed, as you illustrated, at the rate of a quid a month!

    As for interest on interest, once the interest becomes part of your balance due, interest is payable on it. It's part of your debt. As someone else mentidiet this is "compund interest".

    Also, with most credit cards, if you have purchases/transfers on your card at different rates (e.g. 0% 6 months), your payments pay off the debt with the lowest interest rate first, leaving the high interest debt collecting interest.

    ***And the golden rule*** , if you have savings that can pay off your debts, use them. The interest you PAY on debts is usually much higher than that which you earn on savings.

    My best advice, go to http://www.moneysavingexpert.com . This is a FREE site with lot's of hints and tips for cutting debt and saving money. http://www.moneysavingexpert.com/cards/ is the "loans and credit card" section.

    Happy Money Saving!

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