Family Fundamentals: Credit: Know what you owe, how you’ll pay it off

How can I calculate how much total interest I will be charged until I get my credit card bill paid off?

First, good for you for thinking in these terms. Too many people, especially young people, continue to rack up so much debt on credit cards that they may not be able to pay it off — ever.

In fact, a recent Ohio State University study showed that many younger people — those born between 1980 and 1984 — tend to spend more money than they make every month, making up the difference on their credit cards. The result could be a lifetime of trying to manage credit card debt. The researchers said it was likely many could die decades from now, still owing money on their cards.

The key, obviously, is to live within your means, stop using credit, and make higher monthly payments to eliminate debt as soon as possible. But as your question reflects, sometimes it helps to see the costs staring at you in black and white.

The Federal Reserve offers a nifty online calculator to help you figure out just how much you’ll end up paying over the long haul, depending on how much you owe, the interest rate and your monthly payment.

To use the calculator, go to http://www.federalreserve.gov/creditcardcalculator/. 

First, plug in your total balance and the interest rate (the “annual percentage rate,” or APR) on the card. The site asks for the “highest” rate with a balance because many cards charge higher rates for different types of credit — for cash advances, for example. If you have any balance at the higher rate, the calculator asks you to input that higher rate just to be conservative.

With just those two pieces of information, the calculator will tell you how long it will take you to pay off the credit card balance if you make only the minimum payment each month. For example, if you owe $7,000 and pay 12.9 percent interest:

• The calculator estimates your minimum payment is $140 a month.
• If you pay just the minimum payment each month, it will take you 24 years to pay off your balance — that’s if you don’t put any other charges on the card.
• You’ll end up paying more than double what you owe — a total of $7,416 in interest charges alone.

With that sobering piece of news, you can also use the calculator to figure out how you can pay off your credit card balance more quickly. You can do so in one of two ways:

• Enter the number of years you hope to pay off the card. To pay off this balance in two years, for example, the calculator tells you you’ll have to pay $333 per month. Your interest charges will total $980.
• Enter a higher monthly payment: If you pay $250 per month on the card, it will take you three years to pay off your balance, and you’ll pay $1,374 in interest.

Whatever you decide to do, be sure you make your payments on time. The calculator doesn’t take into account any late fees that could affect your plans.

Family Fundamentals is a monthly column on family issues. It is a service of Ohio State University Extension and the Ohio Agricultural Research and Development Center. Send questions to Family Fundamentals, c/o Martha Filipic, 2021 Coffey Road, Columbus, OH 43210-1044, or filipic.3@osu.edu.

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