Accredited investors learn how to use personal debt in their favor to achieve wealth. They have a keen knowledge of how compounding of interest can work for them (with investments) and against them (with debts). These traders understand that personal credit card debt can be one of the most severe types of personal debt if not paid off quickly.
This kind of debt was created to remove the most sum of money within the longest time period possible from the card owner. 2,000 on a very nice large TV that would go with your high def entertainment center perfectly. What could you do to get that TV today if you didn’t have the money? 8,183.46 over 26 years if you let me have that TV today? ” Would that be considered a great option?
8,183.46 in long-term debt? Throughout this post, I will quote numbers which come from a crude credit card payment calculator I created using Microsoft Excel. The numbers may not be exactly accurate, however they are close enough to demonstrate my factors being made. Ever wonder why you get so many “you have been approved for” letters in the mail about some new credit card?
Also, lots of the same companies distribute words for you repeatedly. How can they afford to do this to more and more people repeatedly? It can be afforded by them because credit cards are VERY profitable for individuals who make their payments faithfully. In fact, people of questionable credit are even sought by come companies since they can charge higher rates of interest because of the higher risk. If these people make their payments at the bigger interest rate to try and build or repair their credit history, then your company has a profitable situation.
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- The interest rate
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Faithful payers for high interest loans are the ultimate money machine for these companies. Most of us are accustomed to a fixed rate loan where you borrow a set amount at some interest to be repaid over a time period resulting in a flat monthly payment. Month Each, more of the principle is paid off while the interest charged with this decrease also reduces.
Eventually toward the end of the loan, most of the payment will go toward the concept and very little will go toward interest. In my own terminology, I call this a theory focused loan because the reason for the loan is to boost the amount paid toward concept as the loan matures.
This kind of loan is within the interest of the debtor since the goal is to get the loan paid as fast as possible without giving too much toward interest. On the other hand, the purpose of credit card debt is to avoid paying toward the concept and increase the sum of money paid toward interest. Every month the credit card issuer changes the minimal payment due to be always a set percentage of the rest of the debt balance, usually 2 to 3 3 percent of the total amount due.
As the total amount is paid, the minimal payment decreases. Therefore, because the payment credited continually lowers as the total amount decreases, it takes a long time before the payment would help you to zero. Even while, most of the payment every month goes toward interest and very little toward the principle (lower of your debt). I call this a pastime focused loan. This type of loan is in the eye of the lender or credit card issuer because the goal is to continue receiving the biggest amount of interest obligations from the debtor for as long as possible.
It is not in the best interest of the credit card company to get these loans paid since their income from interest would then stop. 1,786.74 of total interest. 1,641.58 before the debt is paid. 3,539.29 of total interest. 2,000 initially borrowed for the TV at the end of 10 years. 1,290.02 in the event you pay the balance completely. They know you are improbable to pay the balance due so they can look forward to getting a lot more money from you for yet another 16 years! 2,000 at the same 19.99% annual interest more than a 10 12 months period. 38.64 for the full 10 years.
Lets now make comparison’s with the above mentioned credit credit card example. 1,786.74 using credit cards minimum payments. 1,641.58 for credit card debt. The difference becomes a lot more pronounced after a decade. At that time, the loan is paid off. 3,539.29 using credit credit card minimum obligations. 1,290.02 on the credit cards where the fixed rate loan is paid. 6,183.46 in interest from you using minimum payments on the credit card.