Credit - Head Matters

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1. Benefits and Costs

e. Calculate How Long It Takes to Repay Debt and the Total Cost When a Borrower Makes Minimum Payments


Americans love credit cards. According to a Money Central at MSN.com, the average cardholder has 7.6 cards per cardholder with an average household credit card debt of $8,000.  An $8,000 debt at a rate of 18 percent interest will take more than 25 years to repay and cost more than $24,000.   Unfortunately, many Americans—college students included—also are head over heels in debt. (source: http://CardWeb.com and MyVesta.org)

If you consistently have a balance on your credit cards, you are probably overspending. The low minimum payments are tempting, but interest rates on credit cards are high (often 18 to 22 percent, and even upwards of 35 percent) because the loan they are providing is an unsecured loan—that is, a loan with no collateral backing it. The total amount you end up paying for things you charge and don’t pay off at the end of the month can be staggering.

The following chart shows the results if you pay only the minimum payment on a balance of $2,200.

Credit Card Balance Interest Rate (%) Charged Monthly Payment Months to Pay Off Balance Years to Pay Off Balance Total Cost (Balance + Interest)
$2,200 18% $40 minimum 117 9.8 $4,683
$2,200 18% $50 62 5.2 $3,385
$2,200 18% $200 13 1.1 $2,422

Does it really make sense to pay someone more in interest than was borrowed? And that cost assumes that you make your minimum payment every month. If you miss payments, you may get late fees and risk hurting your credit rating. Also, this chart assumes you don’t charge anything more on the credit card.

Look at how much sooner you could pay off your debt and how much less interest you’d pay if you are able to pay more than the minimum monthly payment – even just $10 more per month makes a big difference!

Use this calculator to see just how expensive paying interest on your debt can be.


Cost-of-Debt Calculator

The interest you pay on your debt can quickly become very expensive. Use this calculator to help determine just how expensive your debt has become. Enter all of your credit cards and outstanding installment loans balances. Find out how much you owe, how much interest you are scheduled to pay and how long it will take to pay it all off.


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Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

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