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Tip of the Week
When you owe money, you often pay interest. How that interest is calculated affects how much paying interest actually costs you. Simple interest is calculated on the balance you owe. Compound interest is calculated on the balance you owe plus interest. How often the amount is compounded affects the cost.
Credit cards are compounded each month. This means that if you carry a balance on your credit card, then one month’s interest on the amount you owe will be added to the balance. If you don’t pay the balance the next month then you are paying interest on the interest. Clearly this will add up! Mortgages are compounded twice a year, which is one of the reasons that mortgages are a better way to borrow than credit cards.
Canada Revenue Agency is the champion - they compound their interest each and every day, weekends and holidays included. They have mastered the art of collecting money. Business owners pay CRA promptly due to the compounding of amounts owing and the fact that interest paid to CRA is not deductible. When you are looking at interest rates, you need to find out how the interest is compounded before you will understand the true cost of paying that interest.