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The Debt "Secret"

Creditors have a secret they will do anything to protect. This secret — kept in Manhattan penthouses by old cigar-smoking white men — makes banks filthy, filthy rich. This secret allows the rich to rob from the poor. Despite its limitless power, the secret is hidden in plain sight. You may know the secret already; though you may not know just how rich it is making your creditors (and how poor it is making you).

It is also easy to forget the secret, or to dismiss it. You may have learned it along time ago, vowed to take action and then, months later, forgotten all about your resolve to stop your creditors from using the secret against you. So what is the secret?

The longer a creditor can keep you in debt, the richer they become.

It actually doesn’t matter what the interest rate is! Higher interest rates are designed to keep you in debt longer as much as they are to charge you more each month!

Consider the interest you will pay on a a $5,000 loan at an 8% APR, over different terms.

1 Year, Total Interest: $219.28
3 Years, Total Interest: $640.48
5 Years, Total Interest: $1082.80
10 Years, Total Interest: $2279.20

Now consider this. When you have the flexibility to make smaller payments on a debt, as you do with a credit card, the term can stretch to as much as 30 to 40 years if you never pay more than minimum. Then consider the average credit card interest rate (about double our 8% example), and you can be looking at paying more than twice your original debt in interest before the principal is even paid off.

As you can see, it’s no wonder those bankers are rich. Fortunately, we know their secret. But what can we do about it?

I recommend following what I call the three year rule.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. There seems to be a problem with the “three year rule” link.

  2. Sorry, the post disappeared on me! Should be fixed now.

  3. All this and not to mention how a credit card company can ‘up’ your interest rates even if you pay on time always, but pay late on a Different card!

  4. The rich have been doing this to the poor forever. The banks and the credit companies want to heep you in debt forever.

    Look at Mortgages:
    If you made biweekly mortgage payments you could pay off your mortgage 7 years earlier on a traditional 30 year mortgage and save thousands of dollars in interest. But many lenders don’t even give the option to do this and the ledners that do typicaly charge you a fee. Or many times even if you pay the lender a bi-weekly payment, they may hold it and pay it monthly, or apply the excess to the interest instead of the principle…