Compounding in Reverse: How Debt Grows

Every lesson about compound interest has a mirror image. When you owe money, the compounding works for the lender.

Understanding this is the fastest way to stop losing money.

Credit cards

A credit card charges interest daily on your balance. Unpaid interest becomes part of the balance and earns interest itself.

At 24% a $5,000 balance costs about $100 a month in interest alone. Pay $150 and only $50 touches the debt.

That is why minimum payments stretch for decades. The minimum payment calculator shows how long.

Fixed loans do not compound in the same way, because you pay the interest each month. But the structure still favors the lender early on.

In the first years of a 30 year mortgage most of each payment is interest. The balance barely moves.

Extra payments break this pattern. Each one removes interest from every remaining month.

Paying off a 24% credit card is the same as earning 24% risk free. No investment offers that.

Paying off a 7% mortgage early is the same as earning 7% risk free. That is close to long run stock returns, with no risk.

Build a small cash cushion first, around one month of expenses. Then clear the highest rate debt.

Keep paying minimums on everything else. When one debt is gone, roll its payment into the next.

Compare the two main methods in the snowball vs avalanche calculator.