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Wednesday, September 8, 2010

Fun with Numbers- Credit Cards & Calculators

Credit cards are a very convenient and easy way to purchase products and services, especially big ticket items where its not too reasonable to carry large amounts of cash with you.   They also can be the kiss of death if you do not pay your total amount in full and carry revolving debt.   Most really don't understand how much interest can accrue or know ways to get some control so that debts can at least be more manageable.

Before I give an example of how to better control credit card debt, here is a link to a site called 'CalculatorWeb' where they provide numerous financial calculators relating to investing (bonds, compound interest, etc), finance (credit cards, leases, loans, rent vs. buy,etc), planning (budgeting, retirement, education,etc) and currency:

There are many websites like this which provide free calculators, but I like this one personally.

Ok, a quick example of how to get greater control of your credit card debts.   Let's say you have a revolving debt of $2500 on a credit card with an interest rate of 18.99% and minimum payments of $100/mo., and you will not be using that card to make additional purchases until the amount is fully paid off... Based on the above figures, it would take 33months, or 2.75yrs to fully pay the $2500 and your total interest would be $707.

Now, lets say you increased your minimum payment by just $5 a month to $105.   That debt would be paid off in 31 months and total interest paid would be $662, a decrease of $45 which in real terms is $45 less you have to give to the credit card company and which you keep in your pocket

Taking the same example, if you were able to increase your minimum payment to $120/mo, the total debt is paid off in 26months, or a little over 2 years, and the total interest you pay is $557.   In other words, increasing your monthly payment by $20 (if your budget allows) means the original $2500 debt is paid off in 7 less months and a savings of $150 in interest.

So even if you're in an unfortunate position where you have a revolving credit card debt and not the means to pay in full, you still have the ability to control the amount of interest you pay and the length of time that debt hovers over you, based on whatever your personal budget allows.  It is never a good time to be in debt but especially in the present economic recession.   Be pro-active.

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