now that we know how to use the loan manager let's use it to set a goal and to pay down one
of our credit cards the first thing we need is the information about the card balance we also
need to know what annual rate the credit card company charges and we have to get from the
credit card company the effective monthly rate in our previous example it was easy it was an
installment loan and in a case like that you simply divide the annual rate by 12 to get you
a monthly rate but with credit card companies it can be a little more tricky sometimes the actual
rate that's compounded every month or the actual rate that's multiplied by the balance to get you
the interest for that month might be difficult to calculate unless you talk directly to your
credit card company and find out exactly what they're doing to calculate the monthly interest
rate you also have to know how its compounded and again that would come from a conversation
with you and your credit card company if it's not expressly listed on the monthly statement but once
you know that you can determine how many payments you want to make to bring the balance down to zero
and you have to decide how much you can afford each month in our example we'll be paying down
the balance of the Capital One credit card the Capital One credit card in your file should have
a balance of one thousand eighty dollars after the last exercise that we did let's imagine that
Capital One charges you a twenty four percent annual interest rate and let's imagine in this
example that the monthly interest rate is easy to calculate let's imagine Capital One has assured
you that whatever the balance is at the end of each month that number will be multiplied by
two percent and that result will be added to the balance if that's the way they do it then the loan
manager will help you set this goal we will try to pay off this balance in one year and we will
try to come up with a hundred dollars per month to be able to pay it off but we don't yet know
what monthly payment we will need until we go to the loan manager however before we go to the
loan manager if you're paying down a credit card balance there are a couple of things that you must
do first first you must change the account type of the credit card to other current liability only
long-term and current liability type of accounts will work with the loan manager you must resolve
not to use the card after you start using the loan manager to pay it off if you use the card
after you start the loan manager the numbers will be meaningless you will not pay down the loan on
the day you set the goal for so you have to be very strict and very careful from the icon bar
let's open the chart of accounts let's click on the capital one account and from the bottom left
click account edit account now all you have to do was change it from credit card to other current
liability save and close now you're able to use it in the loan manager from the main menu click
banking loan manager notice the old loan is still there and we're going to click add alone
the account name in this case is Capital One now notice it will show up here because we change the
account type to other current liability the lender is also capital one from our vendor list and let's
make the beginning of the loan July 1 because if the balance now is 1,000 and we're gonna start
paying it off in July let's make it July 1 and the original amount is 1080 the balance of the
credit card now here's where we experiment we assume we can pay it off in 12 months then click
Next the due date of the next payment will we will be disciplined and we'll pay it at the beginning
of the month so July 1 will be the date of the first payment and we will try for $100 every
month now we don't yet know if that's going to work we'll have to adjust the numbers after we
finish this section click Next now remember whatever number you put in here QuickBooks
will turn into a monthly rate because you have to put in the annual rate so let's put in the annual
rate of 24 percent so that QuickBooks gives us a monthly rate of 2% which is what we assume the
credit card company is charging us when we click finish oops before we click finish we have to tell
QuickBooks which a bank account we're paying from we have to tell QuickBooks which expense
account will accumulate the interest expense so we know exactly how much we paid an interest and
sometimes there are additional monthly service fees that we will record into this account bank
fees we can use the same accounts as the other loan if you choose click finish and now we have
a loan which is helping us pay down the Capital One credit card the most important tab is this
payment schedule now if we scroll all the way down we see that we were not exactly going to
finish after the 12th month because of the way the interest and the payments are mathematically
speaking after you make that 12th payment you will still owe $28 and if you wait a month to
pay the $28 it'll become $29 before you pay it off so this is a pretty close approximation of what it
would take and of course you could always play with the numbers to get them a little different
for example if you did not want to have this $29 payment left at the end you could try something
else you could try edit loan details and click Next and instead of making the monthly payment a
hundred dollars let's see what happens if we make the payment a hundred and four dollars then click
Next click OK now you can see that oh very good if you make a hundred and four dollar payment every
month instead of a hundred dollar payment every month you will pay it off in 12 payments and the
twelfth payment will be a little bit less than the hundred and four so this is the way to explore and
experiment with it when you decide what you can pay and when you can pay and how you can pay it
and now let's make our first payment before we make the first payment let's take a look at the
numbers in the trial balance notice the capital one balance is 1080 and the interest expense is
360 if we scroll all the way up we notice for the first payment interest is twenty one dollars that
means that this interest expense will increase by twenty one dollars and become three hundred and
eighty one dollars notice the principal reduction for the first payment is eighty two dollars now
that means that the balance of capital one credit card will decrease by eighty two dollars and
become nine hundred ninety something so that's what's going to happen after we make the first
payment the balance of the account will go down to nine hundred ninety something and the interest
expense will go up to three hundred eighty one in the loan manager we click the first line and
then we click setup payment notice it confirms the amount that the loan will decrease it confirms the
amount of interest you will have and it confirms the amount that will decrease the bank account
because you're writing a check when you click OK the check comes right here notice it assumes it's
check number 8 you can put whatever you want you can put whatever you want in the memo field but
it's nice that QuickBooks put payment 1 and it splits the hundred and four dollars into
these two accounts and you can confirm the money's coming from Chase Bank the only thing you have to
put yourself is the date that you're physically writing the check and in this case I believe we
said July 1 and after we click Save and close and then yes we can then look at the trial balance
and see that Capital One has decreased to 997 and that interest expense has increased to 381