University researchers launched a new debt calculator yesterday to help people understand the impact of compound interest.
Dr Neil Stewart and Dr Matthew Roberts, of the University of Warwick's department of psychology, said many people had trouble visualising how debt could accumulate through compound interest.
They hope their calculator will not only help people understand this, but enable them to see the simple steps they can take to reduce their debts more quickly.
The calculator, which was designed for credit cards but can also be used for mortgages and loans, is available free of charge at www.warwick.ac.uk/go/decisiontool.
Once people have logged on to the site they simply type in how much money they owe and what interest rate they are paying.
The site then enables them to see what impact increasing their monthly repayments would have on their overall debt.
Dr Stewart said: "This simple new decision tool is designed to help people understand the relationship between how much people decide to repay each month and the long term cost of their debts."
He said to repay a debt people needed to choose between making larger repayments and getting out of debt quicker, or making minimal repayments but being in debt for longer and paying back more."
For example, if someone had a £2,000 debt on a credit card which charged an APR of 20 per cent and they made monthly repayments of £40, they would pay a total of £4,300 back before they cleared the debt.
But if they increased their monthly repayments by just £10 a month to £50, they would pay £1,000 less in interest and repay the debt in five and a half years instead of nine years. ..SUPL: