The truth about debt

For the next few weeks we’ll be talking about personal debt. Household debt has been rising steadily for the last year and more and more people are struggling to make payments on credit cards, auto loans, personal loans, and more.

The first thing you need to understand about debt is just how expensive it can be, and that means understanding compound interest. Compound interest can cut both ways; it’s great when it’s earning you money in a savings account but it is what makes high interest debt like credit cards so expensive.

Here’s a quick quiz. If you buy something for $1,000 and put it on a credit card with a 20% interest rate, how much more expensive did you make that purchase if you pay it off by only making the required minimum payments every month? How much will you pay in interest on top of the original $1,000?

A. $100
B. $267
C. $661

You can find the answer right here.