During the 1970s a minimum credit card payment of 5% was common. Then Andrew Kahr, an industry consultant, became a sort of hero by convincing his clients – the credit card companies - to reduce it to 2%. He also championed the zero percent introductory rate that we see heavily advertised even today.
The challenge for this
week?
Chad and Kate have
a credit card balance of $6,500, with an 18% APR and a minimum payment of 2%
per month. If they pay only the minimum
payment each month, how long will it take to pay it off?
The CreditCards.com minimum payment calculator revels that, if paying the 2% minimum every month, it will
take almost 44 years to pay it off, and they will have
paid $17,896.66 in interest.
Of course this assumes no late or missed payment fee, no new purchase,
and no interest rate increase for more than four decades.
I can probably think of
something else that I would rather do with $18k. How about you?
From a recent Purdue
Federal Credit Union (PFCU) agreement:
“When you receive your
billing statement you may pay the full amount due or a lesser amount, but the
least you may pay is the minimum payment amount shown on your billing
statement. Your minimum payment will be any amount past due or over-the-limit
plus the larger of 3% of your new balance or $20.”
In other words, assuming
there’s no past due balance and we’re not over the limit, the minimum payment on
an initial $6,500 would be $6,500 x .03 = $195.00.
The advertised annual
percentage rate (APR) would be 11.5% - 17.5%, “based on your credit
worthiness."
Unfortunately we don’t
know what our actual interest rate
will be until we already receive the card, and when we feel that magical power surge through
our hands.
But let’s assume a 15%
APR, then the first month’s interest payment will be $81.25, and the payment
applied to the principal is $113.75.
In this scenario, it
would still take more than 14 years to pay off the original $6,500 of spending
and they would pay more than $4,000 in interest. But they would save more
than $13,000 in interest charges compared to the other scenario.
The couple has also saved
$6,500, and is exploring savings options to build that to $10,000 for a home
down payment within six years.
If you were their very
best friend and they asked you for guidance, then what would you say?
One alternative for Chad
and Kate would be to pay off the credit card debt with cash on hand, and then
begin to save for the home down payment. For example, $130 saved
every month would build to $10,000 in about 6-1/2 years, even at zero percent
interest! If they could save $195.00 then they would reach their
goal in just a bit over 4 years. Note
that I do recommend saving for at least a 20% down payment.
From the last that I
heard, there are somewhere around 5,000 credit card issuers, but the top four
combine to hold more than 50% of the market, in both the number of cards issued
and in dollar volume. If you have a credit card, check to see if
it’s in the Consumer Financial Protection Bureau credit card agreement database.
I searched “Citibank NA”
and it listed 40 agreements; some of them are clearly labeled, such as "My
Best Buy Credit Card", “My Best Buy MasterCard“, and "SearsCharge PLUS Account", but others
are labeled such as “Agreement 1” or “Agreement 61”. Two were simply labeled "0".
If you have a card issued by Citigroup, JPMorgan, Bank of America, Capital One, or another top issuer, then happy hunting!
If you have a card issued by Citigroup, JPMorgan, Bank of America, Capital One, or another top issuer, then happy hunting!
Best regards,
Kurt Burnett
---------------------------------
February 4, 2016
- 2016 personal debt might be a bigger problem than it was in 2015 (Debt.com)
- Bank Credit Cards (Nerdwallet) - Not
a particularly catchy title, but this article offers thorough
explanations of how credit cards work.
- Is That Credit Card With the Annual Fee Really Worth It? (Associated Press)
- No Degree? Here Are 10 of the Best Paying Blue-Collar Jobs (MoneyTalksNews)
- These college majors will leave you drowning in debt (Money
Management International)
January 28, 2016
- Ask the Experts: Which debt should I pay off first? (Money
Management International)
- Bad credit? Subprime cards aren’t your only option (CreditCards.com)
- Most Unreadable and Wordiest Credit Card Agreements (Kurt
Burnett)
- Survey: 5 in 6 Americans admit to impulse buys (CreditCards.com)
- Why we all lie about credit card debt (Money
Management International)
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