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Wednesday, May 20, 2020

The Cost of Carrying a Credit Card Balance


Carrying a credit card balance month after month is a sign that you are using the credit card to finance a lifestyle you can't support.  Ideally, credit cards should be used only as a convenience tool so that you don't have to carry cash, particularly when you travel.  Credit cards should be used because they significantly boost your credit rating if you keep your debt-to-card-limit ratio below 30% and pay the card off each and every month.  Without credit card use, most of us would have a hard time obtaining an excellent credit score.  As a result, we would pay literally thousands and thousands more for our homes and cars and often, insurance.

If you owe credit card debt, devise a plan to pay it off ASAP.  Here is what carrying a credit card balance is costing you.

How much in interest charges does a credit card balance accumulate over the years?  This can be illustrated using the following assumptions:  (1) The current balance due on a credit card is $3,000; (2) the card will not be used any longer; and (3) a monthly payment of exactly $100 will be made each month until the balance is paid off.

APR                        Total Interest Paid                                No. of Monthly Payments
 17%                       $960.00                                                 40 (3 years, 4 months)                         
                16%                         $881.00                                                 39 (3 years, 3 months)
                15%                         $806.00                                                 39 (3 years, 3 months)
                14%                         $735.00                                                 38 (3 years, 2 months)
                13%                         $666.00                                                 37 (3 years, 1 month)
                12%                         $602.00                                                 37 (3 years, 1 month)
                11%                         $540.00                                                 36 (3 years)
                10%                         $480.00                                                 35 (2 years, 11 months)
                09%                         $423.00                                                 35 (2 years, 10 months)

As the above table illustrates, a person with a 9% APR credit card will pay less than half the interest rate than a person with a 17% card.  Naturally, increasing the monthly payment will result in less interest charges and a quicker pay-off; however, paying only the minimum required payment each month will significantly increase the amount of interest and pay-off period.  How much? The table below uses the same terms given above, except the monthly payment has been reduced to $50. Notice the increase in pay-off time and interest:

APR                    Total Interest Paid                                No. of Monthly Payments
   17%                        $3,789.00                                                136 (11 years, 4 months)                     
                   16%                         $3,115.00                                                123 (10 years, 3 months)
                   15%                         $2,613.00                                                113 (9 years, 5 months)
                   14%                         $2,219.00                                                105 (8 years, 9 months)
                   13%                         $1,897.00                                                98 (8 years, 2 months)
                   12%                         $1,626.00                                                93 (7 years, 9 months)
                   11%                         $1,395.00                                                88 (7 years, 4 months)
                   10%                         $1,193.00                                                84 (7 years)
                   09%                         $1,015.00                                                81 (6 years, 9 months)

Pay off your credit card debt as quickly as possible.  Give up purchases you don't need so that you have an extra $20, $30, $40 or more to pay towards your credit card debt each month.

Paying Off Credit Card Debt

Paying off credit card debt can take a long time if you have a high interest rate. Basically, one should pay as much as he or she can each month and try to negotiate with the card issuer for a better rate.  Below is a table that illustrates the monthly payment required to pay off a balance in one or two years with a 9.9% interest rate.  Other assumptions made -- the card is no longer used and there isn't an annual fee.

                                                                                                    Monthly Payment*
                        Current Balance                                One Year Plan   Two Year Plan
                        -----------------------------------------------------------------------------------------------------------------
                            $5,000                                                     $441                        $231
$4,750                                                     $419                        $220
$4,500                                                     $397                        $208
$4,250                                                     $375                        $197
$4,000                                                     $363                        $185
$3,750                                                     $331                        $173
$3,500                                                     $309                        $162
$3,250                                                     $287                        $150
$3,000                                                     $265                        $139
$2,750                                                     $242                        $127
$2,500                                                     $220                        $116
$2,250                                                     $198                        $104
$2,000                                                     $176                        $  93
$1,750                                                     $154                        $  81
$1,500                                                     $132                        $  69
$1,250                                                     $110                        $  58
$1,000                                                     $  88                        $  46



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