The Federal Trade Commission, which counts consumer protection among its many mandates, has recent released a credit card debt calculator that yields some disturbing results many consumers may not wish to see. The calculator, which uses the assumption that you will only pay the minimum monthly payment, is a stark reminder to consumers of how insidious and difficult credit card debt can be.
Using the FTC calculator, I input the average American household credit card debt of approximately $8,000 and used interest rates of 10%, 12%, and 16% to find out how much long it would take, and perhaps most importantly, how much it would cost to pay off that debt by paying only the minimum payment. My findings were a little unnerving. Here are the examples:
- A household with $8,000 in debt on a credit card with a 10% interest rate will spend $1,570 on interest over the course of EIGHT YEARS by paying $400 per month and adding no new credit card charges.
- A household with $8,000 in debt on credit card with a 12% rate will spend $1,962 over the course of NINE YEARS by paying $400 a month.
- A household with $8,000 in debt on a card with a 16% APR will spend a shocking $2,852 over close to a DECADE, again paying $400 a month.
Given these frightening figures, including the fact that, as a person reduces their overall balance, the required monthly payment will drop, I think the FTC calculator probably understates the length of time, as well as the interest cost involved. For example, when the debt amount is cut in half, consumers would be tempted to pay $200 instead of $400. Doing this could increase the time to repay debt by two or three YEARS, if not more.
In my opinion, the purpose of the calculator is to both educate consumers and make debt repayment seem reasonable. However, with double digit interest rates, I think it is fair to assume that it will take most households at least a decade to get out of debt.
Fortunately, for the time being, credit cards are still offering 0% interest rates on balance transfers for 1 year ( I emphasize still, as many companies are dramatically pulling back on these offers, and a visitor to site in three months may find that 0% balance transfers only last for 3 or 6 months.) Nevertheless, 0% balance transfers are still here, and doing a 0% balance transfer can help reduce the time it takes to pay off credit card debt substantially. In the process, hundreds of dollars can be saved in interest.
Using both the balance transfer calculatorat our website and the FTC’s repayment calculator, we came up with some credit card debt repayment figures that are much easier to digest. In fact, with 0% balance transfers, getting out of debt can take a fraction of the time it would take without them. Here are a few examples:
- If a household with $8,000 in debt at a 10% rate does a 0% balance transfer and pays their debt down $400/month during that year, they will have $4200 in debt at the end of that year. Then, using the FTC calculator, it would still take 7 years to repay the debt. However, this assumes a monthly payment of only $210. Better yet, the total interest cost will only be $810, more than $700 less than the orignal amount. That’s not bad at all.
- The same debt load on a card with a 12% rate would also take 7 years to repay. However, the payments are only $210 and the total interest cost is $1,012, nearly half of what it would have been.
- Lastly, an $8000 debt at a 16% interest rate obviously provides the most savings. How much? Instead of racking up close to $3,000 in interest expenses, the total cost to pay off the debt is $1,470, or less than 50% of the original amount.
It goes without saying that getting out of credit card debt is never easy. However, the smart use of balance transfer credit cards that offer 0% interest rates can shave years off the time it takes to repay debt while saving hundreds, even thousands of dollars in interest.
To find out how much you can save with a 0% interest balance transfer, you can use our balance transfer calculator. If you are ready to start saving, you can apply online for a 0% balance transfer credit card in the appropriate section of this website.
Getting out of credit card debt is always much harder than getting in to it. However, the smart use of balance transfers can help you get on the right track and limit your interest costs substantially.
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