Cut credit card interest costs by exceeding minimum payments

Summary

This 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.