Revolving loans
Credit card debt is
a revolving loan;
you keep paying the
money back and
borrowing more
whenever you charge
something on your
card. So, if you owe
a thousand dollars
on one of your
credit cards and it
carries an 18%
annual rate of
interest you can
figure out what your
interest charge will
be. Because the
interest you are
paying is figured
monthly, you can do
this by dividing the
18% interest rate by
the 12 months of the
year and find out
that you will be
charged1.5% on the
one thousand dollar
balance each month.
To do so, you will
just have to
multiply 1.5% by one
thousand dollars and
you will get your
interest for the
month, which is
fifteen dollars.
$1000 X 0.015 =
$15.00.
Now this is where it
gets interesting. If
you pay the typical
minimum due of
fifteen dollars that
month, you will
still owe a thousand
dollars and that
will be the balance
moving forward. Yes,
there will be
another fifteen
dollar interest
accrual too. So, how
would you get out of
the debt if you only
paid fifteen dollars
a month on it? If
you pay twenty five
dollars a month, the
payment will be
applied so that
fifteen dollars
would pay the
outstanding fifteen
dollars of interest
and the other ten
dollars would co
towards your total
outstanding balance.
SO, if you haven’t
charged anything
additional onto this
account, your next
month’s balance will
be down ten bucks to
$990.00.
The interest charge
for that next month
will be 1.5% of
$990.00 as well. So,
if you do the math,
you will find that
this is the only way
to pay down credit
on a revolving
interest rate
account. You have to
make more than the
minimum payment.
Credit card
companies are famous
for imposing these
tiny minimum due
amounts and if the
customer only pays
that each month,
they will never get
out of debt.
Lawmakers have
lobbied for a long
time to ensure that
laws are pasted that
require credit card
companies to demand
higher monthly
payments so this
does not happen, but
many consumers feel
it is their right to
have low payments –
and it is still, but
you have to have
logic when it comes
to your debt and
finances. You will
get no where if you
are paying this high
interest and paying
the minimum due each
month.
In fact, most credit
card companies
charge impressive
amounts for their
late fees as well.
These late fees are
posted right o your
account and if you
get one, you will
see it charged right
to your account the
next month on the
statement. If you
get late fees
because you are late
– you will also
never get out of
debt in this
situation. Revolving
loans can be deadly
if you pay like
this.
Nonrevolving Loans
Loans that are put
in place where you
borrow a specific
amount all at once
and pay it back over
a period of time
(such as car loans)
work differently
than revolving
interest rate loans.
The lender figures a
payment on the loan
itself over the
scheduled period of
time calculates the
interest charges
over the life of the
loan (reporting for
the interest
decreasing as the
loan is paid down
each month) and then
decides a fixed
monthly bill amount
that you have to
pay. This is also
known as the
principal plus the
interest and it must
be pad in the time
allowed to pay back
the loan. As you
already understand,
these loans are much
different than
revolving ones.
Now, paying ahead on
a loan will save
interest charges and
allows you to pay
off the loan faster.
Say you decided to
pay double the
amount of your
payments the first 3
months of each year
you had on a car
loan that was for 4
years. If you did
that you would cut
off an extra 4
months from the car
loan’s life. You
reduced the
principle early in
the loan.
Student loans
You may loath your
student loans, but
you should be
thankful they are
not revolving loans.
One thing we want to
recommend is that if
to have extra money
each month, pay off
a revolving interest
bearing account
first. Get rid of
the nasty amount of
money you will pay
on top of your
existing revolving
cards first. Even
though you may be
temped to see your
student loans
disappear, stay on
target with them and
pay extra on the
revolving accounts
first. Even if your
credit card
(revolving) account
carries a lower
balance, you will
end up paying as
much as your student
loands balance over
the years so do it.
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