This will be a short post. I am kinda feeling the 'toll' of this week. 2 days working flexi job, 2 days of interview, with yesterday being reallly bad with me puking out phelgme cake 3 times, cramping in gym and driving and stayed out until 10pm++, same for today - interview, then hang around out until near 10pm. Feeling very stoned and tired.
Tomorrow no interviews but arranged to meet up with an ex-collegue partly cos I got her help to put down as referee, partly she is on no-pay so not in former workplace and also to catch up with her, since she is quite nearby. So tonight I try to sleep earlier, tom wake up a bit later. Then just take it easy...
RUNAWAY BALLOONING TIME BOMBS
Coming back from the previous entry, where $1.2k, 12mths instalment plan, would balloon up to $1366, with $166 interest ONLY IF it is paid off in full in Dec with a once-off lump sum of $766.
What else can happen? Well now going to look at pro-longing the payment for another 1 year, just to see how the numbers play out.
Remember there is assumed to be NO extra purchases/instalment plans. Hence every month, there is no more additional $100-$50 in terms of nett increase in debt due to increase in principal sum.
Outstanding debt %766, still paying minimum of $50. NO extra purchses.
Yr 2,
1st mth=> $766(debt) + $15.32(interest) -$50(min) = $731.32
2nd mth=> $731.32(debt) +$14.63(int) -$50(min) = $695.95
3rd mth=> $695.95(debt) +$13.92(int) -$50(min) = $659.87
4th mth=> $659.87(debt) +$13.20(int) -$50(min) = $623.07
5th mth=> $623.07(debt) +$12.46(int) -$50(min) = $585.53
6th mth=> $585.53(debt) +$11.71(int) -$50(min) = $547.24
7th mth=> $547.24(debt) +$10.95(int) -$50(min) = $508.18
8th mth=> $508.18(debt) +$10.16(int) -$50(min) = $468.34
9th mth=> $468.34(debt) +$9.37(int) -$50(min) = $427.71
10th mth=> $427.71(debt) +$8.55(int) -$50(min) = $386.26
11th mth=> $386.26(debt) +$7.73(int) -$50(min) = $343.99
12th mth=> $343.99(debt) +$6.88(int) -$50(min) = $300.87
There are a few observations of what happens when minimum payment continues.
After 2nd year. You actually owed $766. You paid up $600 in total again. BUT in Dec when you see the statement, instead of owing just (766-600= $166 more, you actually now still owe $300.87 (300.87-166= 134.87 extra)
Maybe u realised it by now, the extra amount came from the compounded interest. So after 2 years of paying minimum. You owed 1.2k initially, you paid $1.2k already, but you still owe $300.87 extra. That is the accumulated interest in 2 years, compounded at 2% per month.
Another observation is that as the outstanding sum is small, less than $800, the $50 minimum payment actually helped to reduce the interest cos a part of it went towards repaying the principal sum. BUT it is slow-acting effect cos the interest is high.
Now another important note is that THIS interest-reducing aspect DOES NOT come with every and any loan amount outstanding in a credit card. Lets blow up the numbers a bit bigger to $3k. Assuming no extra purchase on this $3k rolling. Maybe a scenario of an outstanding amount on a card not closely monitored. Monitored in the sense, didnt notice how it grows like a balloon. But of course every month, pay minimum.
Yr 1, debt $3000, 0 extra purchase, monthly minimum $50.
Mth 1 $3000(debt) +$60(int) -$50(min) = $3010
Mth 2 $3010(debt) +$60.20(int) -$50(min) = $3020.02
Mth 3 $3020.02(debt) +$60.40(int) -$50(min) = $3030.42
Mth 4 $3030.42(debt) +$60.61(int) -$50(min) = $3041.03
Mth 5 $3041.03(debt) +$60.82(int) -$50(min) = $3051.85
Mth 6 $3051.85(debt) +$61.04(int) -$50(min) = $3062.89
Mth 7 $3062.89(debt) +$61.26(int) -$50(min) = $3074.15
Mth 8 $3074.15(debt) +$61.48(int) -$50(min) = $3085.63
Mth 9 $3085.63(debt) +$61.71(int) -$50(min) = $3097.34
Mth 10 $3097.34(debt) +$61.95(int) -$50(min) = $3109.29
Mth 11 $3109.29(debt) +$62.19(int) -$50(min) = $3121.48
Mth 12 $3121.48(debt) +$62.43(int) -$50(min) = $3133.91
Now its clear enough to see that in ANY loan, so long as amount repaid cannot exceed interest amount, then 0 principal repayment occurs. Which meant that interest compounded on interest is happening and that explains why the interest is increasing still despite payments.
End result is this. You owe $3000. You paid $600. And you now owe $3133.91. No dent in the debt amount. It in fact increased due to interest on interest.
This has implications.
Firstly it is left long enough with just minimum payments, it can ballon up really fast.
Next to reduce this effect, it means the payments should be higher than the interest, keep it higher by a more than just $10 cos the amount you pay over and above interest helps to reduce principal amount. Hence instead of paying $50 minimum as reflected in the statement, pay $100 if can. Next month, pay $90 if cash is tight. Try to go above the minimum sum and dont miss any or even revert back to minimum later on. Just have to bite the bullet lower down the amount until it is like the earlier example, where the overall amount is reduced.
Of course, the price in both examples, the credit card company wins. You lose more in 2nd example than 1st example cos you just might manage to repay and clear off the debt eventually say 1 more year. But in example 2, you can never seek to clear that at all, unless a big enough amount is repaid either once-off or monthly.
These scenarios can happen in any loans so long as there is interest. But the credit card has one of the highest interest out there, hence is much more severe.
So anybody who signs on credit cards have to keep these at the back of the mind, whether financial savvy or not, whether high income or lower. Its a matter of being aware, vigilant and also NOT overspending.
Credit card instalment plans help those without the entire lump sum to purchase something over a period of time, gradually repaying. Definitely the monthly repayment was part of your budget and definitely affordable to you then while you were making the decision to sign on. BUT dont let your guard down over this repayment period. You have to be dilligent and remind yourself that every month, you actually ALREADY spent that instalment amount, cos you have to pay for it at the end of that month. Hence guard against overspending. Cos you have to pay for all your this month purchases and also add in this instalment together. Instalment plans have its good but if you are complacent, it might grow into semething else altogether. Make good on your monthly instalment, make sure you have set aside part of your salary every month for that amount, before spending on others.
Next entry, phantom money and others.
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