What the Bank Wants You to Know about Credit Cards

Albert Einstein said that compounded interest was one of the World’s marvels. In fact, he created a quick rule of thumb to determine its magic called the “rule of 72”. Long known to financial planners, this simple rule of thumb allows you to swiftly calculate how many years it takes for your money to double, given a certain interest rate.

Example, you have $3,000 dollars that you are investing in a CD that is paying you 4% and you want to find out how many years it will take for your money to double to $6,000 dollars. The rule states that you have to divide the number 72 by the interest rate you are being offered and this gives you the number of years it takes for your money to double. So, 72/4 = 18. This means, at 4%, it takes 18 years for your money to double.

To better understand the power of compound interest, let’s consider the following example:

A person aged 30 is investing $10,000 dollars, look at how compounded interest multiplies his money over time:

As you can see from this example at 1% interest rate, what you get from most banks, it will take until you are 72 years of age (72 / 1 = 72) to double your money. On the other hand, at 12% interest rate, your money doubles every 6 years! (72 / 12 = 6) and just with your original $10,000 dollars that you invested one time, you would be a millionaire just by waiting!

Now, how much would you get if someone paid your 25%? Let’s do the math: 72 / 25 = 2.88, this means under three years you will double your money.

In other words, if you lend someone $3,000 dollars at 25% you will have, in under three years, $6,000 dollars. Now, what about if in the meantime you could charge this person $60 a year just for the privilege of having borrowed money from you? And what if, in the meantime, you charged him another $25 or $30 dollars every time he was late with the payment or because you deliberately waited a couple of days to make sure he was late before inputting the payment into your computer; or since you have been doing this for a while, you sent him his statement and timed it in such a way that unless he cut you a check right at the moment when he receives his statement he would be late?

What if years of doing this taught you a few tricks, such as every time someone calls you to ask you for this loan you said he or she has to buy insurance? Although an illegal practice, you could rack up another $30 to $60, right? Or, just for the heck of it, you raised his or her rate to 28% because, in your personal opinion, he is overstretched in his finances?

Now, even if as much as 30% of the people borrowing from you, at some point in time, couldn’t pay you anymore, would you care? In this example, you only loaned them $3,000 dollars, if the guy sticks with you for just one year, you made money! If he doesn’t pay you anymore you’ll get extra profits from the collections agency or if you are smooth and lure your customer into a Credit Counseling Organization, which after all receives payments from you, you’ll make even more money under the guise of helping the guy.

Would you participate on the most profitable businesses known to Mankind? Welcome to the world of the Credit Card!

Compound interest is your best weapon and ally when you use it to build wealth, however it is your most deadly enemy when you are at the receiving end.

Wield this weapon to grow your wealth, not to end up working for Wal-Mart or Macdonald’s at age 70.