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# Financial Literacy

Payback Scenarios

# Payback Scenarios

The facts tell us that the average amount owed by all the Americans households that owe money on credit cards is \$14,500. That’s almost five times what Clive Clueless, the intrepid mountain climber, found himself owing, but the logic is the same: if you make only the minimum payment on a credit card balance, it’ll take forever to pay off and cost significantly more than what you borrowed in the first place.

The average American has a little better deal on their card than Clive Clueless as a first-time credit card user:

• 14% APR
• \$100 annual fee
• Minimum payment on this card is “interest plus 1%” or at least 2.167% of their balance a month (14% APR divided by 12 months = 1.167% plus 1%)

All that translates into a monthly payment of \$300. And means credit card Joe is paying \$170 a month just in interest.

Payment - \$300
Amount that goes to pay interest - \$170
Amount that goes toward paying off his balance - \$130

And average credit card Joe has to earn \$400 to come up with that payment because of income tax.

Joe's earnings - \$400
Tax rate - 25%
Income taxes he pays - \$100
Net after taxes - \$300

If Joe makes the minimum payment, it’ll take over 30 years to repay his debt and cost him over \$16 grand. Even paying \$400 a month (and forgo buying that new car), it will take 4 years to pay it off.

 Pay-off Plan Comparisons Make large payments Make medium-sized payments Make minimum payments Beginning credit card balance \$14,500 \$14,500 \$14,500 Payment amount \$800 \$400 \$314 Number of payments 21 48 370 Balance after 24 months \$0 \$8,149 \$11,392 Interest paid so far \$1,887 \$3,249 \$3,626 Balance after 48 months \$0 \$8,951 Interest paid so far \$4,460 \$6,474 Balance after 10 years \$4,341 Interest paid so far \$11,852 Balance after 20 years \$1,300 Interest paid so far \$15,401 Balance after 30.8 years \$0 Interest paid so far \$16,417

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