Debt is enjoyable until the bill comes in the mail. At this point, individuals must find a way to repay the debt without paying too much interest. Compounding interest can make it difficult to pay off debt balances in a timely manner.
Facts
Compound interest enables lenders to increase an individual's balance each day. Using this interest method, the company adds interest to the principal and the previous days' interest. Most lenders levy interest on debt balances daily, growing the balance exponentially over time.
Function
To decrease debt, individuals should pay more money on the debt early in the month. This will decrease the balance on which the lender charges interest. For example, a credit card balance of $1,000 and a daily interest rate of .0003 percent (10 percent annually) will have a daily interest charge of 27.4 cents. Making early payments will reduce this interest amount.
Considerations
Individuals should try to pay a small amount of extra principal each time they make a payment on debt. This will reduce the negative effects of compound interest and allow more of the regular payment to go against principal, further reducing the balance.
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