How debt compounds
Interest on unpaid debt grows the same way savings do, only against you. A worked card example shows how much the monthly payment changes the total cost.
The snowball in reverse
Compound interest has no preference for direction. On savings, interest is added to the balance and the next period's interest is worked out on the larger amount. On a debt, exactly the same happens — the balance grows, and so does the next charge.
The difference is the rate. Savings rarely earn more than a few percent a year, while unsecured borrowing such as a credit card often costs 20% or more. At that rate the snowball rolls quickly.
A worked example
Take a card balance of £2,500 at 20% a year, with interest added monthly. That is 1.67% a month, which works out to an effective 21.94% a year. Nothing new is spent on the card.
In the first month the interest is £42. That number matters: any monthly payment below it and the balance grows, even though a payment is made every single month.
| Paid each month | Time to clear the balance | Total interest paid |
|---|---|---|
| £50 | 9 years 1 month | £2,920 |
| £75 | 4 years 2 months | £1,180 |
| £100 | 2 years 9 months | £761 |
| £150 | 1 year 8 months | £453 |
At the lowest payment, clearing the debt takes more than nine years and the interest ends up larger than the original balance. Doubling the payment cuts the interest by about three quarters and the time by more than two thirds. The payment size changes the total cost more than anything else in the example.
If nothing is paid
Left completely untouched, the same £2,500 grows to £3,048 after one year and £6,740 after five — more than two and a half times the original amount, without a single new purchase. In practice missed payments usually add fees and a higher rate on top, so the real figure tends to be worse.
What changes the cost
- The size of the payment. As the table shows, paying more each month shortens the debt and cuts the interest sharply, because less of the balance is left to be charged each month.
- The rate. At 10% instead of 20%, paying £75 a month clears the same balance in 3 years 4 months with £441 of interest.
- Minimum payments that shrink. Many cards set the minimum as a percentage of the balance, so the payment falls as the balance does. That keeps each payment small but stretches the debt out far longer than a fixed payment would.
The same arithmetic, both ways
The compound interest calculator shows the growing side of this: what a balance earns when the rate works for you. A quoted rate can understate how fast either side grows, which nominal vs. effective interest rate explains.
These figures assume a fixed rate and no new spending, fees or missed payments. They illustrate how interest on debt behaves and are not financial advice. If debt has become hard to manage, free and independent debt advice services exist in most countries.