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).