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How much would you end up with if you took a penny and doubled it every day for a month? The answer to this question demonstrates quickly why your creditors have the upper hand in your relationship with them.

Taking a mere penny and doubling it every day for 31 days, you end up with $21,474,836.48.

Day 1 the original penny turns into two, Day 2 those two turn into four, and on Day 3 the four turn into eight * The amount the original penny is worth accelerates rapidly because not only does the original penny collect interest, all the pennies being added to the original are earning interest as well and so each day the growth of the original penny is being compounded.

This is why banks and credit card companies make so much money at your expense. They don*t just earn interest on the amount you spend. They also earn interest on the amount of interest your charged when you only make minimum payments.

There are three key components to the amount you'll give to the banks and credit card companies when taking on a debt:

1. How much you owe.
2. Your interest rate.
3. How long you stay in debt based on the payments you make.

The importance of 1 is obvious. If you don*t take on debt you'll never owe the bank anything.

Most people place to much emphasis on 2. Yes, if you receive a 0% interest rate you won*t pay the bank much. And everything being equal a low rate is better than a high one. Were the banks get you however is with 3.

By setting the minimum payment low relative to the balance the banks stretch out your payments for years and sometimes decades. Now they are not only charging you interest on your balance they are charging you interest on the interest you owe them compounding their money and supercharging their profits.

When you hear stories about a consumer spending $15,000 interest on a $5,000 purchase the low minimum payment the bank or credit company set is the reason they ended up spending $20,000 for $5,000 worth of stuff.

The key to keeping money out of the pockets of your creditors is to pay a bit more than the minimum payment each month.

In the example above about the penny compounding over the course of a month. The penny sees most of its gain towards the end of the month. On day 20 its worth $10,458. By day 27 this amount has grown to $1,342,177. And then by Day 31 it hits $21,474,836.48.

Instead of using days like in the penny example let's think in terms of years. If you have a $200,000 30 year mortgage with a 9% interest rate your minimum payment every month would be $1609.

At the end of thirty years you*d finally own your home having spent a total of $579,322. The $379,322 of interest you'll pay represents 65% of the money you'll spend.

However if you were to put an extra $100 towards your mortgage per month you'll spend a total of $479,780 purchasing your home and avoid $99,542 of interest charges reducing your interest costs to 58% of your total payment.

Plus you'll own your home in 23 years and 5 months instead of 30 years. So by investing $28,100 in extra payments you'll avoid $99,542 in interest charges, a return on your money of 354%.

The gains only compound as you increase your additional payment. Increase it to $200 and you'll avoid $151,988 in interest charges, own your home in 19 years and 9 months, and earn a 329% return on your money.

Creditors may set the payment terms when offering you money. They can't dictate that you abide by them though. Use the power of a moderate monthly payment increase to avoid padding your creditors bottom line and save the money for yourself.