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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 $121.78.
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
$3,044.39. With this
payment plan, he will end up paying a total of
$5,875.05,
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 $2,983.43.
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?