Interest *** Interest *** Interest

  • Assume that Ms. Happi Buyer has an account with a major credit card issuer with an account balance of $2,500.00. Her APR (Annual Percentage Rate) is 19.9%.
  • Ms. Happi Buyer has decided to close this account and get it paid off. The interest charged for this month is figured as follows:

19.9% ¸ 12(months) = 1.66% (per month)

$2,500.00 ´ 1.66% = $41.50

  • Assume also that the minimum required payment on this account is 2% of the outstanding balance. The payment on this month's billing would be $50.00. **The minimum payment can never be less than $20.

$2,500.00 ´ 2% (.02) = $50.00

Balance

$2,500.00
Payment

- 50.00

2,450.00
Interest

+ 41.50
New Balance

$2,491.50
BALANCE REDUCTION:

$8.50

Happi's fifty dollar payment reduces her balance by only $8.50!

  • By continuing a payment plan like this one, Happi Buyer’s major credit card account can take up to 31 years to pay in full. Also, by the time that it is paid in full, the amount of interest charged is at least double. On this account, the interest would have added up to be $8,476.00. This is in addition to having to pay the original $2,500 balance.
  • When you think about what you charged on this account, is it worth paying on it for 31 years?
  • If Ms. Happi can send $10 more than her minimum payment each month, she will cut the amount of time it takes to pay this balance off drastically. Now it will only take her 14 years to pay this off. The amount of interest she will end up paying will now only be $3,348.