Interest rates have always been a way for someone to make money without lifting a finger… except for signing that deposit slip at the bank. Interest can either work to your advantage, or someone elses advantage.

Remember, one person’s advantage is another person’s disadvantage.

Interest that can make you.

1) Compounded interest: Huh? Compounded interest is the 8th wonder of the world. Here’s why. Say you put $1,000 into a bank account for one year with a 5% interest rate. At the end of the year, you will have $1,050. At the start of year #2, you will begin to accrue interest on $1,050, not the original $1,000 you put into your bank account.

If you find a bank account that pays 5% interest, please e-mail zack@collegefinance101.com or hanna@collegefinance101.com immediately

In contrast, simple interest would be the original $1,000 accruing interest at 5%, no matter how long it has been in the bank account. You want to avoid this at all costs if you are investing for value.

Other investment tools that offer compounded interest are Individual Retirement Accounts (IRAs). We’ve all heard that tell tale example about the two college grads who get a great job and start making money. They both save the same amount of money, but one saves just a few years earlier than his counterpart… and the difference in the amount of money in their retirement accounts will make you want to throw up. Save early!

Ok, so that’s how interest rates can help you if you utilize them properly… now,

Interest that can break you.

Here are some tricks companies (cough) credit card companies (cough) use to make money off of you.

1) You see an ad for a credit card that charges 1.5% interest a month. Wow, not bad, 1.5%. I’ll take it!

Not so fast, bro. That’s 1.5% a month, not a year. That means 18% a year! You will end up paying almost a fifth of what you owe money on by the end of the year. Why do you think the average credit card debt in America is $4,088?

2) National Cash Advance, and Payday Loans

We’ve all seen these signs. I bet at one point, we’ve all been half tempted to walk in there with last week’s paystub just to see if we can walk out of there with a couple “hundy” (hundred dollars). Man, wouldn’t that just feel so good. Walk in, fill out some paper work here, social security number there, sign your life away where(?), bada-bing, bada-boom, $200 bucks richer.

Then you gotta pay back the loan. Oh, not bad, that’s only 2.39% that you have to pay back… for 1 week! That’s 124.28% a year. Don’t let these companies scam you. They’re basically legal loan sharks and should be a super last resort. If anything, use a student credit card, not a loan shark.

Long story short, stay away.

The only time you should ever use these places is if “Guido” just showed up at your cousin’s front door and will have him swimming with the fishes by midnight if he doesn’t get paid today. Literally.

Be careful when borrowing money. Money is control, and if you’re using someone else’s money, you’re not in control. You have to play by the legal rules, or face harsh repercussions for breaking the rules. Play by the rules, pay on time, and you will surely reap the benefits of doing so.

Just be smart about it; look at the big picture and not just week-to-week or month-to-month.

Think big, think ahead, think long-term. Think.

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