Thursday, September 26, 2013

What Greek Mythology Can Teach Us about Credit Card Debt

The Ancient Greeks may have lived over 2,000 years ago, but their stories have truth today.

Sisyphus was a King who due to numerous misdeeds was sentenced by Zeus to a lifetime punishment of rolling a boulder up a hill, only to have it roll down again.

Thus Sisyphus was consigned to an eternity of useless effort and frustration.

Sisyphus pushing the rock up the hill - Public Domain
This story probably sounds familiar to those of us who have or have had credit card debt. We pay and pay on the monthly balance, yet it seems impossible to make progress getting rid of it.

Why is it so difficult to push the repayment boulder up the credit card hill? One reason is because the hill is made of compound interest.

Compound Interest can be a Heavy Burden to Credit Card Holders

The more benign simple interest is always based on the original principal. In graphic terms, simple interest looks like a sloping but straight line.

Compound interest occurs when interest is added to the principal of a loan, so that from that point on the interest added also earns interest. This may sound like a minor difference, but let's compare a chart that shows a linear progression (simple interest is linear) versus compound interest (compound interest is geometric - which means grows faster as time progresses).

I used a $10,000 loan at 10% interest, with no repayments over a 10 year period. I calculated the loan balance using simple interest, and then with compound daily interest, and put the results in the chart below.

You can see in ten short years, the simple interest balance grows to $20,000, while the compound grows to $27,179.
 Simple versus Compound Interest
I considered running the chart out 20 years, but at that point, the compound interest line goes parabolic and the original $10,000 starts to resemble the United States Federal debt.

The point of this being that due to compounding, especially when coupled with high rates of interest, a debt can take on a life of its own and start reproducing itself faster than the viral Flood in the video game Halo (for my younger readers out there).

So let's leave Sisyphus where he belongs - in the half dozen or so college classrooms that still teach the Liberal Arts and on Wikipedia. We all have enough boulders to push in life without adding new and unnecessary ones, especially when we have to push them endlessly uphill.

Don't buy credit card debt. Yes, the credit card companies will miss you, but they'll get by without you. And I'll bet you won't miss them.