Summary Discussion – Difference in Minimum Payments

An example of differences in interest rates: A borrower has $5,000 in credit card debt. Assuming that the minimum monthly calculations are equal to the monthly interest charged + 1% of the balance each month, the following scenarios would apply (Used Calculator on BankRate - link not provided due to HubPages warning):

8% INTEREST RATE:

Minimum monthly payment = $83.33
Payoff = 248 months (20 years, 8 months)
Total cost of interest: $2,986.55

Alternative Fixed payments of $125/mo.

Payoff = 47 months (3 years, 11 months)
Total cost of interest: $834.91

Alternative payment offers a total interest savings of $2,151.64 with a payoff 16 years, 9 months sooner for $41.67 more a month.


18% INTEREST RATE (10% INCREASE AS IMPLEMENTED BY CAPITAL ONE):

Minimum monthly payment = $125
Payoff = 273 months (22 years, 9 months)
Total cost of interest: $6,923.14

Unwarranted rate increase costs borrower $6,088.23 (based on Alternative Fixed Payment from 8% Example Above) and extends the length of payments 18 years, 10 months – this calculation is based on the assumption that the Prime Rate as published by the Wall Street Journal remains flat (which has historically fluctuated – see, The Hidden Danger of Carrying Revolving Debt on Variable Rate Credit Cards for a more detailed explanation).[1]


[1] http://perryfender.hubpages.com/hub/The-Hidden-Danger-of-Carrying-Revolving-Debt-on-Variable-Rate-Credit-Cards


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