3 moves you can make to save on compound interest

By Aaron Crowe

Reviewed by Kimberly Rotter

May 19, 2023

Read time: 2 min

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Credit card debt seems to hang on forever doesn’t it? That’s because if you don’t pay it off each month, you pay interest on the interest. It’s a brutal cycle. I’ve been there and learned the hard way that the devil is the compound interest.

Just after graduating from college, I charged a large debt when my car needed a major repair. I made a little more than the minimum payment each month, but the balance barely went down. Compound interest was the reason why.

Compound interest is why your minimum payment takes so little off the balance that you owe. It’s the reason your debt payoff can feel like one step forward and a half step back every month.

Here are three money moves to put into your action plan to save on compound interest and get rid of debt.

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1. Pay off the balance as soon as you can 

This can be hard to do, but the logic is clear. As soon as you’re free from the debt, the credit card company can’t charge you interest any more. You can then use your money in many other ways.

Credit cards are basically free loans for a few weeks when you pay them off in full. Paying off your credit card means you won’t have to watch as interest gets added to your balance. 

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2. Pay more than the minimum

So what do you do if you can’t afford to pay off your credit card balances right away? Focus on paying more than the minimum payment each month. 

I saw that minimum payments barely made a dent in my balance. I cut every expense I could and tried to double my monthly payment so that the debt could be chipped away a little faster.

You might also want to stash your credit card in a place where it’ll be hard to use and delete it from shopping websites. Your balance will be harder to pay off if you keep using the card. 

I had to cover an emergency car repair with a credit card, and I couldn’t afford to pay it off immediately. When I discovered how much interest I was paying each month, I put myself on credit card restriction. I only bought what I could afford with the cash I had at the time (or by using my debit card), which sometimes meant eating like a starving college student even though I was a few years out of college.

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3. Choose simple interest loans instead

Simple interest is only charged on the principal balance. You don’t pay interest on your interest charges. Simple interest is common for installment loans. 

You might even save money by using a loan to pay off your credit cards. There are a few simple interest loan options that can make consolidating credit card debt and paying it off easier. 

A personal loan can be used to refinance credit card debt into a simple interest installment loan that has a set payoff date. You won’t be paying interest on interest.

If you’re a homeowner, another option is a home equity loan. Credit card debt can be refinanced into a home equity loan, which is another type of simple interest loan.

A car loan is also a type of simple interest loan, though it can only be used to buy a car and can’t be used to consolidate credit card debt. 

Eventually, my plan was to wipe out my credit card debt and buy a new car with a car loan so that I wouldn’t need to use a credit card to pay for repairs on my old car.

Aaron Crowe

Aaron Crowe is an Achieve contributor. He is a freelance journalist who specializes in writing about personal finances. He has worked as a reporter and editor at newspapers and websites for his entire career.

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Kimberly is Achieve’s senior editor. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a mortgage expert for The Motley Fool. She owns and manages a 350-writer content agency.

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