Wednesday, July 9, 2008

The slavery of minimum payments

Today I got a Credit Card bill on my mail. Balance is $5485.
I took this credit card because it offered to transfer my balance from my "main" credit card and gave me 0% interest for 6 months. Well it's the 8th month now and they are now charging me 4.92% MONTHLY! That's 59.04% annually.
I should've used those 6 months to pay some of the capital that I owed. I did do that, I paid about $1588 for the first 6 months. But in the last month I was expecting a payment from some extra work that I had done and it didn't happen. So what did I do to pay the monthly bills? (including other credit cards) I took out cash advances on this credit card, which basically took it back to the original level I had when I got it, but now I'm paying interest on all that debt. And to really make me feel like crap I have to tell you that the card I was trying to pay off is now all the way up there again!
Looking at the statement closely it's interesting to see how they will keep me in the debt hole if I can't pay more than the minimum payment. Warning, there is a little bit of math ahead.
The interest this month is a total of $276. The minimum payment is $289. So $289 - $276 =  $13 . This means that if I paid the minimum payment only (thus keeping the collectors calls away) I would only lower my balance from $5485 to $5472. If I were to lower my balance by $13 each month, it would take me 420 months to pay that debt off! That's  35 years! And imagine if I were to actually charge more on it.
So, there are two ways I could go on with this card. Actually there are more (like not pay it), but focusing on trying to keep my creditors happy there are 2 ways. In both cases I will assume that I will not charge the card any more.
1) Pay off the mininum balance each month. And it will probably take those 35 years to pay it. Maybe it only takes half, that would be "only" 17 years and 6 months. The good side of that is that every month the payment that I would have to do would be less and less (a few cents probably), and most of it would be going to interest.
2) Set a number above the minimum payment of now and pay that amount each month, regardless of what the minimum payment turns out to be. I will try my best to do this. I'm setting my monthly payment to $300. I will pay them $300 each month. Every month a little more of those $300 will go to paying off the balance. It will be like a regular loan. The bad side of this is that I will have that $300 payment to do every month. The good side is that probably I would pay off this debt much faster than with option #1. Let's see
A little loan calculator I have here says that If I have a loan of $5485 that I have to pay off at a interest rate of 59.04% annually.... wait .. this calculator doesn't go that high! I guess the creator can't imagine someone paying more than 50% interest rate on any type of loan. Maybe the mob has better rates! Anyhow, I'll have to use the maximum value of 50%. Now I have to play with the loan term to get a payment of $300 or close so. I get a monthly paymentof $296 when I set the term to 3 years. Because i'm actually being charged a little more than what the calculator can reach I will probably have a longer term, like 4 years. But it sure beats 35 years !!
Do any of you have a loan calculator that can go up to 59.04% anually ? if you do try telling me the term for a loan of $5485 with a monthly payment of $300.
There are some other options I could use to handle this debt. I could pay the bare minimum while I try to finish of paying other debts and then start paying $300 monthly. I could pay $300 almost every month and less when times get tough(er). Unless I can offload this debt to some other lower rate loan I'll have to pay at least $289 soon and some number like that every month.


La Gringa said...

Try this one:

This page lists some interesting sounding articles.

By the way, you were right: It's 4 years. But if you could increase the payment just $25 per month to $325, you would only have to make payments for 37 months. Big difference.

Here is another calculator that you can download to use with Excel.

I hope that helps.

AJ said...

Thanks for the links. The calculators there are great.

Using my loan calculator i've found out that a little increase in the monthly payment can shorten a loan term a lot! However, the trick is to make sure you can do that montly payment. Either spending less or earning more.

I downloaded one of the spreadsheets there to play around with it.