How Interest Works

How Interest Works What is Interest? Interest is a payment in exchange for the use of money. It can be earned by lending your money to a bank or you might pay interest when you borrow money from a bank. Interest that Interest that COSTS EARNS you money you money Charges against your Money earned on cash temporarily held in: balance on: credit cards student loans savings accounts certificates of deposit other auto loans mortgages investments American Personal Saving Rate Total US revolving debt as of December 2011 2011 3.7% $827.5 Billion 2010 5.2% (98% of it is made up of credit card debt) Types of Interest There are two basic types of interest: simple and compound. Simple Interest Compound Interest The amount of interest earned on the original amount of money invested. The interest paid on interest. Y1 Y2 YI Y2 $5.51 $5 $5.25 $5.25 $5 $5 $5 $5 $5 $5 $5 $5 $100 $100 Let's say you invest $100 at a yearly interest rate of 5% that gives you an interest payment of $5. The next year and each year thereafter, you will be paid $5 on the initial invest- ment of $100. At 5% interest compounded annu- ally, you will have $105 after the first year. If you keep this investment for another year, you will be paid inter- est on $105, which comes to $5.25. The longer you invest, the higher your interest payments will grow. Y5 Y10 Y15 Y20 Y5 Y10 Y15 Y20 The True Cost of Credit Card Purchase or Why Credit Card Debt is the Worst The minimum monthly payment on credit cards usually is 2% of the total amount borrowed - this sounds great but an item you purchased with a CC will cost you over twice as much when you only pay the minimum each month and here's why: 60% $2 $5 60% of your monthly payment becomes profit for the bank for every $5 you send in as a payment, only $2 goes towards paying back what you borrowed The True Cost of Things TV Plane ticket = $500 Television = $1,500 15% interest = $290 17% interest = $1,128 Total money spent: $790 Total money spent: $2,628 Pay off time*: Pay off time": 6 Years 7 Months 7 Years 4 Months "Paying the minimum of 2% ($10/month) *Paying the minimum of 2% ($30/month) The National average interest rate is 14.91% Make Interest Work for You $1,629 This is how it works: 10 years later You put your money in a savings account at a bank $1,000 at 5% interest Investment The bank pays you interest on the money that you keep in that account. In 2010, full-time undergraduate students borrowed In the Third Quarter Average student of 2011 student debt credit card interest rate (as of February 2012) is was an average $4,963 $1 Trillion 17.06% Source: http://www.federalreserve.gov/releases/g19/current/g19.pdf http://www.bea.gov/scb/pdf/2012/02%20February/o212_gdpecon.pdf http://www.creditcards.com/calculators/minimum-payment.php http://www.usatoday.com/money/perfi/college/story/2011-10-19/student-loan-debt/50818676/1 http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html http://www.creditcards.com/credit-card-news/credit-card-interest-rate-report-022212-1276.php http://www.indexcreditcards.com/credit-card-rates-monitor/ Kiboo Copyright © 2012 Kiboo LLC. All Rights Reserved. www.kiboo.com 000