Credit Cards Online Information

$15,000 over 5 cards is about average credit card debt for an American. The common US credit trap seems to be a combination of too much access to credit with limited education what exactly credit is and how much it ACTUALLY costs. There is some math ahead... so prepare yourself.

Until recently your credit card minimum payment was probably calculated at between 2% and 2.5% of your outstanding balance. This meant that you could charge MASSIVE amounts of things you wouldn't normally be able to afford...and still only pay a small amount of money every month. Sounds great right? The problem shows itself when you actually do the calculations. Lets take a $5000 debt at an 18% interest rate (and cue the math)

Lets use B(n) to signify the size of the unpaid balance(B) on a credit card after n amount of months. With that being said the size of the initial loan will be B(0). We'll use i to be the monthly interest rate . The monthly interest rate is annual rate divided by 12. (For example, if the annual interest rate is 12% then i is .01.) If the minimum payment due is 2% of the unpaid balance, we get the following equation:

B(n+1) = B(n) + iB(n) -.02B(n)

So,

B(n+1) = (.98 + i)B(n).

This equation can be solved "easily":

For simplicity, use r to denote .98 + i.

Since B(1) = rB(0), and B(2) = rB(1), etc., we can conclude that:

B(n) = r^nB(0). (*)

Now back to the $5000 of our new debt

You spend $5000 at 18% annual interest to take that killer vacation you've always wanted. Now you think lets just pay the minimal amount possible each time so you can also afford your normal stuff, what amount would be left to pay off after one year?

Back to the math:

Since the annual interest is 18 percent, the monthly interest is .18/12=.015.

Hence, B(n) = .995^n(5000) = $4708.12. This is little progress on retiring your debt from one year of payments.

If you think about the situation here you will see that if you only pay the minimum amount the process could go on forever! Can you guess what interest you'll have actually paid for that $5000 vacation after you finally finish with those minimum payments?

The semi-good news is that most credit card companies have recently, at the urging of our federal government, raised the minimum monthly payment percent to a whopping 4%. With that little change our calculation now looks something like this: B(n) = .975^n(5000) = $3690.00. This 2% change means that after year one of minimum payments you're much better off then the old way - but you are still a long way from wiping out your debt.

# posted by Medical Information : 1:34 AM