Cut credit card interest costs by exceeding minimum payments

CreditCards.com

2 May 201401:53

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

00:00

💻 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

Minimum payment refers to the smallest amount of money that a borrower is required to pay on a debt each month. In the video, it is the base amount Tom pays to keep up with his credit card interest charges. The concept is central to the video's theme, illustrating how only making the minimum payment can prolong debt repayment and increase the total cost due to interest accumulation.

💡Credit Card

A credit card is a payment card that allows cardholders to borrow money to pay for goods and services based on the idea of consumer credit. In the script, Tom and Sarah both use credit cards to purchase laptops, highlighting the convenience of credit cards and the potential debt that can result from their use.

💡Debt

Debt is an amount of money borrowed by one party from another, with an obligation to repay it. The video uses the metaphor of a 'pile of dirt' to represent debt, emphasizing the effort required to 'shovel away' or repay it. Both Tom and Sarah start with an equal debt of two thousand dollars.

💡Interest

Interest is the cost of borrowing money, typically expressed as a percentage of the principal. In the video, the credit cards charge an 18% annual interest, which significantly affects how long it takes Tom and Sarah to pay off their debts and the total amount they end up paying.

💡Principal

The principal is the original amount of a loan or deposit, which does not include interest. The script mentions that the minimum payment includes interest plus one percent of the principal, indicating the portion of the debt that is being actively reduced each month.

💡Annual Interest Rate

The annual interest rate is the cost of borrowing money expressed as a percentage per year. In the video, an 18% annual interest rate is applied to the credit card debt, which is a key factor in calculating the total amount of interest that will be paid over the life of the debt.

💡Progress

Progress in the context of the video refers to the rate at which debt is being repaid. Sarah's progress is described as 'quicker' because she pays an additional ten dollars each month, allowing her to pay off her debt faster and save on interest charges.

💡Extra Payment

An extra payment is any amount paid over and above the minimum required payment. Sarah's decision to pay an additional ten dollars each month is an example of making an extra payment, which accelerates her debt repayment and reduces the total interest paid.

💡Interest Charges

Interest charges are the fees levied on an outstanding balance. The video contrasts Tom's and Sarah's interest charges, showing that by paying more than the minimum, Sarah saves a significant amount in interest charges compared to Tom.

💡Time in Debt

Time in debt refers to the duration for which a borrower is obligated to repay a loan. The video emphasizes that by making extra payments, Sarah reduces her time in debt to six and a half years compared to Tom's nearly 11 years, highlighting the benefits of faster debt repayment.

💡Calculator

A calculator is a device or software used to perform arithmetic operations. In the video, the mention of 'calculators' at the end is a prompt for viewers to use a debt repayment calculator to understand how minimum payments affect their own debt repayment process.

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.