| Let's make an investment:
If we invest
$2000 in an account that pays 19.8% compounded monthly,
how much will we have in the account at the end of five
years?
(If you haven't read
the stuff on
compound interest and you want to follow the math
here, you'll want to check it out before continuing.)
initial
amount invested = $2000
At the end of
each period (month), we'll be earning 1.65%
(that's 19.8% divided by 12 since it's compounded
monthly)...
So, each $1.00 will turn into $1.0165...
growth factor = $1.0165
number of
periods = 12 x
5 = 60
Here's the
formula:
So, with our
numbers...
That's a pretty
darn good investment, wouldn't you say? Our money
more than doubled in just 5 years! Yes, it's a
great investment...
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That's why the credit card companies are so willing to
let you buy stuff with their little piece of
plastic! And
YOU are the chump on the wrong side who's paying all
that interest!
Of course, you are
making payments during this time... But, here's
the rub:
The minimum
payment they ask you for pretty much just covers the
interest for the month!
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So, your balance (that's
the total amount you owe) barely goes down.
Check it out:
You buy some
furniture for your apartment and it costs
$2000... You grab the
nearest credit card... Most charge around
19.8% (especially if you're
a newbie or only have so-so credit)... Let's
look at what happens:
So, that first
month, they charge you 1/12th
of the 19.8% for the
interest... That's 1.65%...
1.65%
of $2000
=
.0165 (
2000
) =
$33
So,
your balance after the first month is
$2033...
And they'll ask
you to pay a "minimum amount" of around
$35. Since most
people only pay the minimum required, let's go with
that. This means you've only paid off
$2 of that big
$2000 balance!
Month 2:
initial
amount =
$1998
interest =
1.65%
of $1998
=
.0165 (
1998
) =
$32.97
(I'm
rounding here because it's money.)
new
balance =
$2030.97 and you pay
$35...
Month 3:
initial
amount =
$1995.97
interest =
1.65%
of $1995.97
=
.0165 (
1995.97
) =
$32.93
new
balance = $2028.90 and you
pay $35.
I'll let you
crunch the numbers for months 4, 5
and 6...
Here's the grim
news:
At the
end of six months, your
balance is $1987.49...
You've only paid down $12.51
of your balance...
But, you've paid $210!
Does this sound
smart to you?
If you continue to
pay $35 a month, how long
will it take you to pay for your furniture?
About 14.5
YEARS!!
And your total
amount paid?
$6090!
That had better be
some pretty great furniture... and you'd better not
spill anything on it!
But, the ugliness
isn't over yet... There's more... Oh...
The horror... I can't take it anymore... You
just read it without me... I can't look!
They won't ask you
to pay $35 the whole time.
As your balance gets lower, they'll ask you to pay less!
If your balance is only $1000
(the interest on this would be
$16.50), they'll ask you to pay only
$20.
So, it's really
going to take WAY longer than 14.5
years and it's going to cost you
WAY more than $6090.
Why do they do
this? Because they don't want you to leave.
EVER! They want you to be their slave for life!
(Insert your own mad scientist evil laugh here.)
There is some good
news though -- if you do make the mistake of having
$2000 on a credit card at
19.8%... FIX IT!!
If you pay
$52.77
a month, you can pay it all off in 5 years.
If you pay
$101.60
a month, you can pay it all off in just 2 years!
There's a lot more
to it (that I'll get to in the next page), but the main
key to getting out of trouble is to pay more than evil
minimum amount.
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