How compound interest can work against you:

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.

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 interest on your interest.

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:

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.

Use our Loan Calculator to see how much faster you can pay off your credit card debt by increasing your monthly payment.

For information on what to consider when deciding which credit card is right for you, see the Federal Reserve Board information on Choosing a Credit Card.

Tip:  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: February 20, 2009