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Paying Down Faster

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THE SCENARIO Lots of people have credit card debt, and most credit cards carry a pretty stiff interest rate. If the interest rate is 15%, any dollar that's put toward paying down the balance earns an automatic return of 15%, guaranteed. Since it's unusual to get a guaranteed 15% return when investing money, a compelling case can be made that paying off such high-interest debt can be a good choice when it's available. Let's see this in action. The question: If I have an outstanding balance of $10,000 on a credit card that charges 15%, and the minimum payment is $200 per month, how much faster do I pay the card off if I pay an additional $100 per month? For bonus points, figure out how much money that saves me overall.

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THE SOLUTION This one has a few parts, which are all pretty straightforward.

1. Find out how long it would take to pay off the card with only the minimum payment being paid.
2. Find out how long it would take with extra payments being made.
3. Subtract to determine how much faster the debt disappears with the extra payments.

First things first, make sure the calculator is using 12 Payments per Year. Step 1: Paying the Minimum N: (This is what I'm trying to find) I/YR: 15 (The card charges 15% interest on the outstanding balance) PV: 10,000 (I start out owing $10,000) PMT: -200 (The minimum payment is $200 per month) FV: 0 (I want to pay off the card)

If I were to make just the minimum payment, it would take me 78.96 months (about 6 ½ years) to pay off the card.

Step 2: Paying Extra N: (This is what I'm trying to find) I/YR: 15 (The card charges 15% interest on the outstanding balance) PV: 10,000 (I start out owing $10,000) PMT: -300 (The minimum payment is $200 per month, and I want to pay an additional $100 per month) FV: 0 (I want to pay off the card)

If I were to pay $100 extra every month, it would take me 43.39 months (about 3 ½ years) to pay off the card.

Step 3: The Difference Making the extra payments saves me 78.96 - 43.39 = 35.57 months, or nearly 3 years. The amount of money this saves me is pretty dramatic:

• The total payments I make if I only pay the minimum every month is $200 x 78.96 = $15,792.00.
• On the other hand, if I pay extra, I pay a total of $300 x 43.39 = $13,016.60.

This means that if I pay extra every month, not only do I save myself about 3 years of time, I also save $15,792.00 - $13,016.60 = $2,775.40. That's some decent savings for $100 per month!

What do you think? Are there better things to do with your money than pay down credit card debt? If so, what are they? Are there cards that you use that have lower interest rates, and if so how low of a rate are you getting? Let us know in the comments!