Electronics

What your debt is really costing you

What your debt is really costing you

Even a balance of $5,100 can add up to a shocking amount in interest costs.

The individual average American is 37 years and makes $ 5,100 in credit card debt, but what does that mean and how does it affect them in the long term?

Believe it or not, this relatively small amount of $ 5,100 debt can add to costs by some large rolls of retirement time. To see the big picture, there are many factors to consider such as interest charges to carry the debt, loss of savings and purchasing power reduced.

The interest cost of debt

The average interest rate on a credit card is 16.75%, and most issuers of credit cards using a method of mixing the average daily balance, which means you will pay interest on a daily. If our average American Joe does not pay the $ 5,100 credit card debt, her minimum payment calculation is roughly as follows:

$ 5.100 x (16.75% / 365) = $ 2.34 in interest paid per day or $ 70.20 per month with none of that balance being applied to his original $ 5,100.

Not too bad either? Now, suppose the credit card company said that its minimum payments are $ 76.50/month and Joe only pays the minimum each month. How long will it take for him to clear his debt?

The answer is more than 300 months or 25 years. The kicker is that he will end up paying $ 20,000 in interest charges on a credit balance of $ 5,100. It is a 3.6 times what was its original balance, and Joe will be 25 more years before you get rid of his credit card debt $ 5,100.

Suddenly, $ 76.50 seems like a lot of money to pay each month, given that he will wear for the next 25 years. The final cost of its debt would be $ 23,500.

The cost of lost savings

Now if you take into account the cost of lost savings, the cost amount of its debt takes a turn for the worse. Assuming he has no credit card debt, but wanted to save a lump sum to retire, is what the calculation should look like:

$ 5,100 in savings over 25 years, without additional cost savings, calculated with a real return of 5% on his money (including 3% for inflation) compounded monthly and give a total of $ 17,755.

He would have made an additional $ 12,655 over his $ 5100 savings just by letting his money sit there and grow. In a unique contribution of $ 5100, it rose to more than three times the original amount after 25 years.

The reason it gets less in total ($ 12,655) than what he had to pay interest credit cards ($ 18,401.60) because of the frequency with which the compounds balance. Most often it compounds the more money can be made because all these little fractions of one cent being added daily accumulate over time, a difference of $ 5,746.60 compared to monthly compounding.

Reduced purchasing power

Now we know Joe had a choice either to pay an additional $ 18,401.60 in interest on its debt to $ 5,100 at the end of 25 years, or earn an additional $ 12,655 over the same amount of money. But there is an additional cost for living expenses because he had to set aside $ 76.50 each month to pay his debt to carry $ 5,100 by credit card.

This amount of $ 76.50 may seem like a lot of money but it pays for a surprising number of articles:

• 15 cups of coffee $ 5 per month or a daily
• Half a grocery budget per month (assuming ~ $ 150 per month)
• 76 iTunes songs per month
• One night in a hotel three stars each month
• A month’s worth of gas
• Dinner for two in a restaurant in average price, including a 15% gratuity and taxes
• Seven new paperback books per month

And to think that if this debt had not, Joe would be $ 76.50/month richer, instead of having to scrimp on its budget to finance its debt.