Cut credit card interest costs by exceeding minimum payments
Summary
TLDRThis script illustrates the impact of making more than the minimum credit card payment. Tom and Sarah both start with a $2,000 balance and an 18% annual interest rate. Tom pays only the minimum, taking 131 payments to clear his debt, incurring $2,039 in interest. Sarah, by adding just $10 to her monthly payment, reduces her debt in half the time, pays only $1,213 in interest, and saves $826. The story emphasizes the financial benefits of paying more than the minimum to avoid prolonged debt and high interest charges.
Takeaways
- 💻 Tom and Sarah both start with a $2000 debt for a new laptop.
- 📈 Both have credit cards with an 18% annual interest rate.
- 💳 The minimum payment required is the interest plus 1% of the principal.
- 💰 Tom only pays the minimum payment, which barely covers the interest.
- 🚀 Sarah pays an additional $10 each month, accelerating her debt repayment.
- 🕒 Tom will take 131 payments, nearly 11 years, to pay off his debt.
- 💸 Tom's total interest charges will be $2,039, more than the cost of the laptop.
- 🏃♀️ Sarah will clear her debt in just over 6.5 years, cutting her debt time almost in half.
- 💵 Sarah pays only $1,213 in interest, saving $826 compared to Tom.
- 📉 By paying just $10 extra each month, Sarah saves significant money and time.
- 🔍 To understand how minimum payments affect debt, use the calculators at creditcards.com.
Q & A
What is the initial balance for Tom and Sarah's credit card debt?
-The initial balance for both Tom and Sarah's credit card debt is two thousand dollars.
What annual interest rate is charged on Tom and Sarah's credit cards?
-The annual interest rate charged on their credit cards is eighteen percent.
What is the typical minimum payment required by the credit card company?
-The typical minimum payment is the interest plus one percent of the principal.
How much does Tom pay each month towards his debt?
-Tom pays only the minimum payment required by the credit card company each month.
What does Sarah do differently from Tom in terms of debt repayment?
-Sarah pays an additional ten dollars each month on top of the minimum payment.
How many payments will it take for Tom to pay off his balance if he only makes minimum payments?
-It will take Tom 131 payments to pay off his balance if he only makes minimum payments.
How much interest will Tom pay over the life of the loan if he only makes minimum payments?
-Tom's interest charges will amount to two thousand thirty-nine dollars over the life of the loan.
How long will it take for Sarah to clear her debt by paying an additional ten dollars each month?
-Sarah will be debt-free after six and a half years by paying an additional ten dollars each month.
How much interest will Sarah pay in total by making the additional payments?
-Sarah will pay a total of twelve hundred thirteen dollars in interest.
How much money does Sarah save in interest charges by making the additional payments each month?
-By making the additional payments, Sarah saves eight hundred twenty-six dollars in interest charges.
How much earlier does Sarah become debt-free compared to Tom by making the extra payments?
-Sarah becomes debt-free four point four years earlier than Tom by making the extra payments each month.
Outlines
💻 The Impact of Minimum Payments on Debt
This paragraph illustrates the financial consequences of only making minimum payments on credit card debt using the example of Tom and Sarah, who both purchased a $2000 laptop with a credit card charging 18% annual interest. Tom makes only the minimum payment, which is the interest plus 1% of the principal, while Sarah pays an additional $10 each month. The result is that Tom's debt takes 131 payments, nearly 11 years, to clear, with interest charges totaling $2,039 more than the cost of the laptop. In contrast, Sarah's extra monthly payment cuts her debt repayment time to 6.5 years and her interest charges to $1,213, saving her $826 in interest and allowing her to be debt-free 4.4 years earlier than Tom.
Mindmap
Keywords
💡Minimum Payment
💡Credit Card
💡Debt
💡Interest
💡Principal
💡Annual Interest Rate
💡Progress
💡Extra Payment
💡Interest Charges
💡Time in Debt
💡Calculator
Highlights
Paying just a little more than your credit card's monthly minimum payment makes a big difference.
Tom and Sarah both charged super sleek razor-thin laptops for two thousand dollars.
Both Tom and Sarah's credit cards charged eighteen percent annual interest and required a typical minimum payment of the interest plus one percent of the principal.
Tom only pays the minimum, keeping ahead of interest charges but not by much.
Sarah pays an additional ten dollars each month, making her progress quicker.
By only making minimum payments, it will take Tom 131 payments, almost 11 years, to pay off his balance.
Tom's interest charges will add up to two thousand thirty-nine dollars, more than the computer itself.
Sarah will cut her interest payments and time in debt almost in half.
Sarah will be in the clear after six and a half years and pay only 1213 dollars in interest.
By paying just ten dollars extra each month, Sarah saves eight hundred twenty-six dollars in interest charges.
Sarah finishes making payments four point four years earlier than Tom.
Sarah can relax while Tom is still paying off his debt.
Paying more than the minimum payment significantly reduces interest charges and repayment time.
The comparison shows the long-term benefits of paying extra on credit card balances.
Visit creditcards.com/calculators to see how minimum payments affect your debt.
Transcripts
paying just a little more than your
credit cards monthly minimum payment
makes a big difference let's take a look
at Tom and Sarah to see just how big Tom
and Sarah both charged super sleek razor
thin laptops on the same day for two
thousand dollars Tom and Sarah are both
very cool cats so each has a beginning
balance of two thousand dollars if you
think of debt as a pile of dirt that has
to be shoveled away Tom and Sarah are
starting out with equal piles both Tom
and Sarah's credit cards charged
eighteen percent annual interest and
require a typical minimum payment of the
interest plus one percent of the
principle Tom only pays the minimum
which means he's keeping ahead of
interest charges but not by much Sarah
though is a go-getter she pays an
additional ten dollars each month it's
like having a helper digging alongside
her so Sarah's progress is quicker how
much quicker by only making minimum
payments it will take 131 payments
almost 11 years for Tom to pay off his
balance
Tom's interest charges will add up to
two thousand thirty nine dollars more
than the computer itself
Sarah however will cut her interest
payments and time in debt almost in half
she'll be in the clear after six and a
half years and pay only 1213 dollars in
interest by paying just ten dollars
extra each month
Sarah saves eight hundred twenty-six
dollars in interest charges and is been
making payments four point four years
earlier so Sarah can chill while Tom's
still digging want to see how minimum
payments make your pile of debt stick
around go to credit cards comm slash
calculators
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