WTFinance: What is Interest?!

Financial Literacy

Large purchases don’t come cheap. A TV, speakers and the miles of cables and cords you need to hook everything up can run you a decent amount of money — but if you use your credit card to pay for them, they can end up costing you even more than you bargained for in the long run. High interest rates are a challenge most of us face, but one you can overcome with a little knowhow.

What is revolving credit card debt?

When you use your credit card, you’re borrowing money from the bank with the understanding that you will pay it back in a timely manner. If you purchase an item for $100 on your card with a 10% interest rate, failing to pay off your balance on time means you owe that $100 plus the 10%. At the end of the day, that item really cost you $110.

If you carry balances from month to month, that debt can really stack up and eat away at your carefully planned budget. It can be a tricky subject to grasp, but if you’re having difficulties rest assured you’re not alone. Thankfully, there’s a light at the end of the tunnel. There are two ways to approach paying off your debt: the snowball method and the avalanche method.

What is the avalanche method?

We all have that one debt that seems insurmountable. Whether you’re paying off student loans, a vehicle or a home, high interest rates can make debt feel like a permanent part of your budget. If tackling a big challenge head-on is your style, the avalanche method may work for you.

With this method, you identify the debt with the highest interest rate and put all of your allocated funds toward paying it off as soon as possible. This is the debt that is costing you more and more as time goes on, and it may take quite some time to fully pay it off — but once that debt is off your plate, you suddenly have a lot more money to work with. You can then disperse those funds as you see fit to pay off your smaller debts.

What is the snowball method?

The avalanche method is most likely the method that will cost you less interest in the long run. That said, the snowball method is considered a great choice for those who need help staying motivated.

With this method, you start by repaying your smallest amount of debt first. Once that’s taken care of, you can apply that freed up money toward the next largest debt, and so on. This is a great way to pay off your debt if you thrive on short-term accomplishments. It feels great to pay off one source of debt in its entirety, and those positive feelings can spur you to take on the next challenge.

What else should I know about interest?

Debt is nobody’s favorite topic, but it can be therapeutic to talk about. Mint’s very own Ashwin Khurana hit the streets of Indianapolis, IN, to ask people about their relationship with their credit cards.

Comments (1) Leave your comment

  1. I think the Mint app is a great financial tool to have. However, there are suggestions/offers made in the alert area but I’m unable to get to the suggestion/offers. Please fix

Leave a Reply