Relax, this isn’t some sales pitch for a revolutionary way to eliminate your credit card debt. As always, the way to solve any problem lies along the educational path.
The number one blockade to getting people onto the real estate investing wagon is their credit card debt. It affects all kinds of things, such as the amount you can ultimately borrow from banks. What we are going to do is take a look at the “expert” advice and tweak it to eliminate your debt in a fraction of the time.
Expert’s Advice: Pay as much as you can towards your biggest credit card. Pay the minimum amount due on all your other credit cards.
Cliff’s Advice: Pay as much as you can towards your biggest credit card. Pay the same amount due on all your other credit cards.
“Whatcha talkin’ about Willis?”
Let’s talk about your car loan. A bank loans you a certain amount of money, at a certain interest rate, and a loan term of X amount of years. “Five year financing with 2% interest” pepper car commercials. Home mortgages work the same way. Every month like clockwork, you receive a bill for the exact same amount.
Credit card companies loan you a certain amount of money at a certain interest rate but with no loan term. Your monthly payment is calculated based on a percentage of the balance. Normally between 2 and 4%.
Example: You decided to buy some expensive burial services for your pet for some insane reason and you have a credit card balance of $5,000 with an interest rate of 18% and a minimum payment due each month of 2.5% of the balance. Let’s run some figures.
Month 1: Using the evil credit card equation, your first payment due is for $125. $62.50 goes to interest and $62.50 goes towards the balance. So your new balance is $4937.50.
Month 2: Using the evil credit card calculator, your second payment is $123.44. $61.72 goes to interest and $61.72 goes towards the balance.
Wait! Last month, it was $125. Now it’s $123.44. What happened? I’m glad you asked. The credit card companies only charge a percentage of the balance (2.5%). As your balance goes down, your monthly payment goes down.
Take a look at what else happened. The amount of money you paid towards interest decreased. Month 1, it was $62.50 and Month 2, it was $61.72. Every month, less and less is applied towards the balance.
If we run the equation all the way to a balance of zero, look at the results over time.
Yes, that’s correct. Two hundred and fifty months to pay off this credit card. That’s 20 years. If you sum up the interest, that’s $4974. Nearly the same amount you started with.
For those who are still reading . . .
The secret to eliminating your credit card debt is NOT to pay the minimum due. Rather pay the same amount each month.
Using the same numbers as before, Month 1 payment is $125. We are going to change the rules and pay $125 for Month 2, Month 3, etc etc etc. If we run the equation until the balance equals zero, look at the difference.
Paid off the same amount of debt but only within 50 months. Not 250. And you can see the reason why. Each month, the amount you apply towards the principle is actually increasing. Not decreasing. Total interest paid is only $1,974, for a difference of $3,000.
What’s the secret?
If you act now, because we can’t do this all day, you can know the secret of clearing debt for only $99.99!
Just kidding. There is no secret. What you need to do is change the rules of the game. Don’t accept your credit card companies repayment plan. Substitute your own. Pay the exact same amount each month.
One last graph, comparing the balance between minimum monthly payments and steady payments. The results speak for themselves.