What is the Real Cost of Credit?

In today’s economic crisis, many families already drowning in debt are now having to deal with excessive penalty fees for everything from missed payments to over‑limit spending.

Some card providers are assessing penalty rates as high as 32% for these credit missteps. In fact, it’s estimated credit card providers will collect more than $19 billion in these fees in 2008! (1)

Fixed Debt Can Save Money
Most credit card debt is “revolving” debt. Because of the way the interest is calculated, it’s difficult to tell how long it’s going to take you to pay off the balance. Revolving debt is compounded when additional monthly charges are added to the balance.

With installment loan debt, payments are scheduled for a fixed amount payable over a specific period of time. It’s easy to tell when the entire amount borrowed will be paid off and – even with a similar interest rate and monthly payment amount – the pay‑off date will generally be much sooner than with a comparable revolving account.

For example:
If a client charges $15,000 on a credit card with a 15% interest rate (APR) and pays $525 per month, it will take 15 years to pay off the debt and the client will have paid an additional $8,156 on top of the initial charge.

With an installment loan (fixed), the same loan amount of $15,000 with a 15% APR, with the same $525 per month payment will take the client just three years to pay off – and they’ve only paid an additional $3,674 on top of the loan.

With a fixed loan, the client could save more than $4,000 in interest and pay off the loan in three years instead.

Protect Yourself
In an age where “easy credit” is not always what it seems, it pays for clients to be educated about the credit cards in their wallet. Failure to manage credit cards could wreak financial havoc.

1.USAToday.com, September 17, 2008 This comparison between fixed and revolving devt assumes revolving payment (minimum) of 3.5% of the remaining balance or $20, whichever is greater. First month’s payment is shown and term assumes continued payment of minimum amount. No additional debt incurred and payments decrease over a time period and also assumes payment of 3.5% of initial loan amount, no additional debt incurred and payment amount remains fixed throughout the term of loan. This illustration is hypothetical only. Each debt situation will vary.

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