Why Debts Normally Take So Long to Pay Off

Creditors design your payment schedule to keep you in debt for a very long time.

Lets look at a typical credit card with a 3400.00 balance at 16.9% interest. First we need to understand some special credit lingo (terms)

Annual Percentage Rate (APR) the advertised Interest Rate (example 16.9%) that you are being charged.

I say advertised rate because it is not the actual interest rate that you are paying. You will pay much more. The reason for this is compound interest. That is, paying interest on interest. This is because credit card companies break down the annual percentage rate (APR) to a monthly rate called the Periodic Rate.

Periodic Rate is the monthly interest rate that you will pay. You will find this somewhere on your statement.

The Periodic Rate is the Annual Percentage Rate (APR) divided by 12. There are 12 months in a year:

Example:

Divided 16.9 by 12 = 1.24166%

Next convert the periodic rate to a decimal. To do this you simply move the decimal two places to the left. This will make calculating a monthly payment easier.

Percentage Decimal

1.24166% Move Decimal .0124166

Always calculate the periodic rate out at least 5 decimal places. Accuracy is important. Trust me that’s what the Creditors do! They are going to get all that is coming to them.

Some Credit cards use a daily percentage rate! This is to their benefit, every penny counts.

Monthly Finance Charge this is the amount of interest that will be charged for one month. IT CHANGES EVERY MONTH as the balance goes down or up.

The preferred method of coming up with the monthly finance charge is the Average Daily Balance. There are other methods but this is the most used. We are going to assume that no more charges were made on the card so the daily balance remained the same.

For ease of explaining lets use the 3400.00 and determine the monthly finance charge.

Balance X Periodic Rate = Monthly Finance Charge

3400 X .0124166 = 42.22 (ok to round)

This is only the interest portion of the monthly payment.

Next we will calculate the actual monthly payment

The actual monthly payment is a percentage of the balance owed. (Usually around 2%.)

Change 2% into a decimal.
Percentage Decimal

2.0% Move Decimal . .02

Example: BalanceMonthly Payment

3400.00 X .02 = $ 68.00

Ok so we now know that the monthly payment is 68.00 and the interest (or monthly finance charge) for this month is $ 42.22. So, that means only $20.12 goes to principle this month.

To illustrate here is 12 months of payments:

The monthly payment goes down each month but, so does the amount going to principle.

At this rate it will take 34.2 years to payoff and you would have paid 10,673.70 in payments. $7,273.70 going to interest.

That is if you stop using the credit card and make only the minimum payments. Scary!

Let’s look at what happens if you pay a fixed amount or constant payment each month instead.

What would happen if you paid a fixed amount or constant payment amount on the same Credit Card Debt

In our example: we will use the same balance of $ 3,400.00 and the current month’s payment $ 68.00 as our constant payment amount. Anther words we will pay a fixed 68.00 a month until the debt is paid off. Paying no more then we are now.

More of the monthly payment is going to principle each month!

At this rate it will take 7.33 years to payoff and you would have paid 5,922.06 in payments. $2,522.06 going to interest alone.

I don’t know about you but $ 4,751.64 is a lot of money in my book. And so is 27 years

No magic here, just the plain truth. Create a plan to eliminate your debt. To start today (Click Here)

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