Credit Card Basics Part 2

♪ ♪ ♪ ♪ Oh, nice man Perfect

Thank you -Oh, hey guys Back again, huh? You're becoming regulars here at Bernie's You remember my buddy, Chris -What's up everybody? -He's digging himself out of credit card debt

While we go on break, lets take another look at his statements and get his credit card problem solved Small purchases really add up over time Look at that balance I've already explained to Chris that in order to pay off his balance he should stop making purchases on the card, right Chris? -I'm cutting them up right now -Nice

But remember, the debt doesn't go away What he needs is a good strategy for paying off his credit card balance On every statement, you will find the minimum payment due This is the smallest amount you can pay each month Credit card companies determine the minimum payment by taking a small percentage of the current balance

From his statement, we can see that Chris' minimum payment is $12178 Lets create a table to illustrate what happens each month if he pays the minimum payment Here's the current balance When Chris makes his payment it leaves him with a balance of $2,922

61 You might expect this to be the new balance on the next statement but remember, the company will add interest for that month Here's the new balance Since the balance from month two will decrease, his minimum payment will also decrease As long as he hasn't made any additional purchases, the current balances and minimum due will continue to decrease each month

So how long will it take to pay off his balance? If Chris only makes the minimum payment each month, it would take 11 years and seven months -That's almost 12 years -But here's the most painful part Remember, he started owing $3,04439

With this payment plan, he will end up paying a total of $5,87505, which includes over $2,800 in interest -I'll be working at Bernie's forever -Don't worry man Credit card companies also state a payment necessary to pay off the current balance in three years

In this case, the amount is $122 -That's only 22 cents more than the initial minimum payment -But remember, you need to make this same payment every month for three years, no matter what future statements show Here's a new table with the current balance and his payment He will make the same payment every month instead of the minimum payment that continue to decrease

Add the interest, and his new balance will be $2,98343 If he continues his plan of making $122 payments, Chris will pay off his debt about eight and a half years sooner and save about $1600 in interest -I can't afford not to pay the $122 -It's a no brainer

But pay close attention to what will be on the next monthly statement The minimum payment has been reduced as expected However, the three year payoff amount is no longer $122 That's because statements are always calculated to pay off the current balance in three years from the date of the statement If Chris' plan is to pay off the $3,044

39 balance in three years, he is gonna have to ignore the three year payoff amount on future statements and stick to making $122 payments -21, 22, 23 -Not bad Today Chris made $23 in tips, which is pretty typical Lets say he's disciplined and puts $23 more towards his payment every month

Then his payment would be $145 Lets create a graph to show consistent monthly payments in the time it takes to pay off the current balance Here's $122 payments And here is $145 payments A $23 difference

By paying the additional $23 each month, he will pay off his balance seven months sooner If we plot all possible monthly payments, the graph will look like this It's important to remember that as the payment increases, the time necessary to pay it off decreases The more he pays, the sooner he'll pay off his balance For example, if he would make $300 payments, he would pay the balance off in about one year

Make sense? But be careful when interpreting the graph Adding $23 to any monthly payment may not result in paying off the balance seven months earlier Lets compare $300 payments to $323 payments Adding the extra $23 to his $300 payment only reduces the time by one month When he changed his payment from $122 to $145 he shortened his repayment by seven months, but when he changed his payment from $300 to $323, still a $23 difference, he only gained one month

So why does the impact of an additional $23 diminish as the monthly payments increase? This is because the relationship between the payment and the payoff time is an inverse relationship As the payment increases, the amount of time decreases at a decreasing rate Understanding these concepts will help you in creating a budget to pay off your credit card balance You're on your way to being debt free -Finally

-Problem solved -Hey, you ready to get back to work? -How about another fry?