Suppose I had an $8000 bank loan and an $8000 credit card. They both have the same interest rate 14.40% and they both have a minimum payment of $232.00 this month. If I make my payments faithfully month after month.. never pay late.. and I don’t charge any more… I’ll pay $2387.70 in interest on the bank loan and $5366.10 in interest on the credit card when I finally pay them both off.
Why is there such a big difference?
What is it about the CREDIT CARD that allowed them to charge me almost $3000 more in interest than the bank loan, even if the RATE WAS THE SAME?
THE ANSWER: It’s the minimum payment amount they asked me to pay. But both payments are same are they not? Yes they are.. for THIS month.. but what about NEXT month?
During the FIRST month, here’s what it looked like:
MONTH 1
Bank Loan (BL) – $232.00 ($136 Principal + $96 Interest)
Credit Card (CC) – $232.00 ($136 Principal + $96 Interest)
Looks the same doesn’t it? Now lets look at the second, and subsequent months:
MONTH 2
BL – $232.00 ($137.63 Principal + $94.37 Interest)
CC – $228.00 ($133.63 Principal + $94.37 Interest)
MONTH 3
BL – $232.00 ($139.28 Principal + $92.72 Interest)
CC – $224.00 ($131.24 Principal + $92.76 Interest)
Skipping down to Month 10…
MONTH 10
BL – $232.00 ($151.41 Principal + $80.59 Interest)
CC – $199.00 ($116.72 Principal + $82.28 Interest)
So what happened? The credit company LOWERED what my minimum payment was supposed to be. Whereas the Bank Loan kept my payment the same. Notice how on the bank loan the amount of principal I’m paying is going UP each month. This is NOT SO with the credit card. In fact… on the credit card my principal amount is going DOWN instead of UP. This is because when they lower your minimum payment, they are also lowering the amount that gets put towards principle. This helps THEM and not YOU.
Creditors use a formula to determine your minimum payment. It usually goes something like this: BALANCE * PAYMENT RATE = MIN. PAYMENT
In this case.. $8000 * 2.9% = $232.00 (most of the time the payment rate is between 2% and 3%. The lower it is, the LONGER you will be in debt!)
During the second month they applied the formula again:
$7864.00 * 2.9% = $228.00 (they round to the nearest dollar)
So what does all this mean to you? Well.. the BANK LOAN is going to keep my payment at $232.00 month after month for 45 months. The bank loan has a definite END to it. When I make my last payment to the bank loan it is finished.. DONE!
The creditors don’t want you to be DONE, so this lowering of the monthly payment is meant to keep the loan from a DEFINITE end to an INDEFINITE end. This way they keep you in bondage longer and get more interest out of you. By lowering the monthly payment this way… by the time I pay off the bank loan during month 45, I’ll STILL OWE $3697.66 to the credit card company.
Finally.. if I keep making minimum payments to my credit card (just like they ask), I’ll finally have it paid off around month 188. Do you know how long that is? That’s 15 and a half YEARS! It is a subtle, sneaky trick that the credit card companies do to millions of people everyday.
The SOLUTION to this problem, if you don’t want to be a victim of it, is to NEVER lower the amount you pay on the credit bill. If this month you are asked to pay $232 for a minimum payment, then keep paying at LEAST $232 per month until the debt is gone. You’ll be paying MORE principal each month instead of paying LESS principal doing it THEIR way. It’s the only way to win.
Now with the new credit card laws… the credit companies MUST indicate how long it would take you to pay off your debt if you ONLY made minimum payments. They still don’t necessarily tell you that you can pay it off much faster IF you keep your payment the same. Ultimately it is still YOUR CHOICE as to how much to give to the credit card company. Paying only the minimum each month will HURT you in the long run. Now at least you are informed as to WHY.
The SNEAKY Cost-Difference Between a Credit Card and a Bank Loan
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