Credit Card Minimum Payment – Credit Card Interest Doesn’t Work The Way You Think

Hey guys! Justin Conroy here and in this
video I want to show you how credit card companies determine your monthly
statement, how they calculate the interest that you pay, and most
importantly, how they’re lying to you about how much interest you are actually
paying. So, the first thing that I want to cover in this video is my stance on credit cards. And, that is simply this – a credit card can be a very useful tool at
your disposal, however, it can also destroy your life. And, I don’t mean to be so dramatic and say it like that but it’s honestly the
truth. I have unfortunately seen this happen to way too many people who get
bogged down in credit card debt so much that they can’t even breathe and it it
ruins families, it ruins lives and (you know) it’s just not a place you want
to be in. So, I believe that a credit card requires a certain amount of financial
education, a certain amount of discipline ,and if you are incapable of paying off
the balance every single month no matter what, you should not have a credit card. And, I’m sorry if that sounds harsh but that is honestly my stance and I fully
stand behind it. It’s a dangerous, dangerous object it’s a dangerous thing
you can get yourself into it can destroy your life so until you’re ready and until
you’re sure you can pay off that balance every single month don’t get a credit
card. So, with all that being said, let me go ahead and switch over to my computer
so that I can show you how credit card companies calculate your monthly
statement, the interest they charge you and demonstrate to you how they’re
actually lying to you about the interest that they’re charging you. So first
things first I’ve come here to to get a general idea of
what kind of interest rates we’re looking at for normal cards you know
these days and this is on their page that they’re calling a so called a low
interest rate cards so let’s just scan through a few here we have a 14 to 25
14 to 25 yeah okay about the same 15 to 28 and all of these are variable okay so
scrolling here just looking they’re all about the same they’re all roughly
between 15 and 28 percent so for our calculations what we’ll
assume is 15 percent on the low-end and 25 percent on the high-end so what I’ve
done here is I have built a spreadsheet to calculate not only the monthly
payment the minimum monthly payment that you should pay on a given credit card
statement but also the interest that the credit card company will charge you now
I have to make a quick disclaimer and say that all credit card companies do
things just a little bit differently so if you try to plug in your numbers to my
sheet it may not match although it might I was able to match my spreadsheet to a
few online calculators but there were also a few that I couldn’t match them to
but that’s okay because it still illustrates the point and we’ll see that
definitely here in a few minutes so so what I’ve done is I’ve applied a few
rules for example the annual percentage rate is up at the top and we’re gonna
fill that in in just a second and that is gonna help us calculate the interest
which which gets calculated on the credit card balance and you know one of
the major rules that most companies follow is they actually compound your
interest daily and that’s unfortunately another way that they like to get money
out of you daily compounding it’s not monthly or yearly it’s daily compounding
the other rule that I built into this is that it does have a minimum minimum
payment so let’s say for example that based on the calculation the minimum
payment should be about 17 dollars this spreadsheet assumes that the minimum
that will ever go is $25 so even if it’s calculated to be 17 the credit card
company will say you know what you need me go ahead and pay 25 and so that’s
built into this sheet so let’s go ahead and start plugging in some numbers we
saw earlier that the annual percentage rates on credit cards right now are
somewhere between 15 and 28% so let’s start with 15 and see
where that leads us for this example I’m gonna go a little bit extreme
probably something most people would never do but I feel like this example
clearly illustrates the point because if you’re paying minimum payments this is
honestly the best case scenario and the best case scenario is unfortunately not
very pretty so what we’re gonna do is we’re gonna assume that we get a credit
card in our hands it’s our first credit card we don’t really have a clue what
we’re doing so we run out we buy a flat-screen TV for a thousand dollars
and then we get cold feet or whatever the case may be and you decide I don’t
know if I did the right thing and you cut up the card okay and you never use
it again and so there the card only has one transaction and it’s $1,000 and then
and that’s what we’re gonna have to pay on so you get your bill the balance is
$1,000 the minimum monthly payment comes out to be $50 that’s there it’s usually
about 5% of the of the balance is your minimum and you see those magical words
minimum monthly payment that sounds wonderful
that sounds amazing I bought $1,000 TV I only have to send $50 man that’s exactly
what I’m gonna do so you send the $50 and the credit card company gets your
money and they say hey thanks buddy I appreciate you only paying the minimum
but because you’re rolling over a balance and you didn’t pay off that card
in full we’re gonna tack on some interest so they tack on about 12 bucks
next month comes along and you get your bill and you’re thinking yourself why
paid 50 on that thousand so I should get a bill for 950 well they tacked on their
interest so it’s actually it’s 962 5% of 962 is your new minimum payment and
again you see a minimum payment you think man that’s great and you pay them
the minimum send them about 48 bucks they say hey thanks buddy appreciate
that minimum payment here’s your interest and so on and so
forth and you do that until the card is paid off
you keep getting your bills you keep paying the minimums and you keep getting
more and more interest and so that goes on for a while at some point you’re
gonna hit that limit that I was talking about earlier where your your bills not
gonna go less than $25 and you’ll start getting minimum payment bills for 25
until finally one day you you pay off the card and it’s it’s over and that
happens in 2022 if we go to the top here we bought that screen that flat-screen
TV in 2019 January of 2019 and we paid it off in 2022 of July or July of 2022
it’s a long time I want to take this opportunity to expand some cells that
I’ve been hiding these are the numbers these are how these things actually kind
of play out in the end so if you are only making minimum payments this is
what you’re looking at on that thousand dollar flat-screen TV with a 15 percent
annual percentage rate I do want to be clear the credit card company is not
doing anything illegal they’re not doing anything nefarious they are calculating
exactly what they said they would calculate they said 15 percent annual
percentage rate and in their fine print they also said we’re gonna we’re going
to compound your interest daily and so that’s what they do the problem is is
when you pay the minimum payment over a long period of time that interest really
starts adding up so let’s look at what what that means we buy our TV in 2019 we
pay it off in 2022 three and a half years later three and a half years later
that’s a long time to be paying on a thousand-dollar TV and in the–at the
end of the day we ended up paying almost two hundred and fifty dollars in
interest a quarter of the price two hundred and fifty dollars in interest so
our thousand dollar TV actually cost us almost 12 hundred and fifty dollars
which means if you do the math on that that our effective interest rate not the
annual percentage rate but the effective interest rate over
that three and a half years is actually closer to 25 percent not 15 and this is
how they get you and this is how I’m gonna say they lie to you they say oh
your interest rates only 15 percent but a lot of people pay the minimum and they
only pay the minimum and the credit card companies end up getting a lot more than
15 percent let’s change this number because we saw lots of cards on that on
that website that had interest rates up in the twenty five twenty eight range
I’m gonna type in twenty five and if we just jump down to the numbers here we
end up paying a thousand dollars for the TV but with our interest we end up
paying over fifteen hundred dollars for this TV that’s an effective interest
rate of over fifty percent this is almost 52 percent effective interest
that’s tremendous you could almost you’re halfway to buying another TV with
that kind of money that’s a lot of money and so this is this is how they get you
this is how they get you when you when you don’t understand the math behind the
interest rate calculations minimum payment sounds wonderful but it’s not
fifty two percent is not fun no one should pay fifty two percent effective
interest ever so let’s take a step back because at this point you’re probably
saying to yourself hang on a minute nobody buys a thousand dollars worth of
merchandise and then cuts up the card and pays the minimum until it’s until
it’s done and unfortunately that’s that’s true that usually doesn’t happen
that’s that’s an extreme case that’s best case scenario unfortunately if
you’re only paying it paying minimum payments so what I’ve done is I pulled
up another situation over here I’ve not hidden anything everything’s
already exposed we’re looking at twenty five percent interest and in this case
instead of buying a thousand dollars in that first month and then stopping we’re
assuming that we buy a thousand dollars every month and we only pay the minimum
payments so every month we buy a thousand dollars worth of stuff
every month we pay the minimum payment every month we get tacked on with some
interest and so on and so forth and we do that until hopefully one day we wake
up when our balance is fifteen thousand dollars and our minimum minimum payment
is seven hundred and fifty dollars and hopefully we wake up and we stop and
that’s that’s the example that I put up here and I’ll take a quick aside here if
you’re saying but wait a minute hang on you know the credit limits not that high
well you’re right I mean at some point you’re gonna hit your credit limit and
the company the credit card company is maybe for a little bit gonna say wait a
minute you’ve hit your limit you can’t can’t get you know I can’t charge any
more but you know in my experience and the experience of the people I’m around
typically speaking when we hit our credit limit we get a magical phone call
or an email from the credit card company that says hey buddy this looks like
you’d hit your credit limit why don’t we go ahead and increase that for you and
that that’s happened honestly every time I’ve ever hit my limit they they just
keep keep increasing it and they do that because they want you to spend money the
more money you spend the more money they make so in all likelihood they’re just
gonna keep increasing your limit as long as you’re paying your bills they’re
gonna keep increasing your limit so I’m ignoring limits in this example
for that reason because they really don’t exist
they’ll just increase it so I’ve got a fifteen thousand dollars here your
balance you finally wake up you’d say hold on I can’t even pay the minimum
balance anymore the minimum payment anymore and you know so you stop putting
money on the card you finally cut it up and you start paying minimums until lots
of time goes by get to your 25 minimums here and you finally pay off the card
let’s look at the summary up here at the top so we start in February of 2019 we
pay the card off just over 13 years later 13 years later we buy a total of
just under 20,000 hours worth of merchandise okay so that
was all of our $1000 purchases here all the way up until the last month just to
get us to that 15,000 oh so we buy just under $20,000 worth of merchandise but
we pay the company credit card company just under $34,000 total which means
that our interest alone is $14,000 so they say that again we paid 19 weap
we bought 19 thousand dollars worth of merchandise and we paid fourteen
thousand dollars worth of interest so you pay almost as much interest as you
paid in merchandise and stuff that you actually took home and it all equates to
an effective interest rate again effective being my own terminology
effective interest rate of almost seventy two percent on a twenty five
percent annual percentage rate card compounding daily paying minimum only an
effective rate of 72 percent almost 72 percent that is tremendous and you know
if if you were sitting in a car dealership and the car salesman said hey
you know we’re gonna we’re gonna finance that car for you at an interest rate of
72 percent you’d laugh in their face and walk out the door so why are we handing
this kind of money to credit card companies so final thoughts what’s the
moral of the story here I’ll go back to my stance on credit cards if you can pay
them off every single month they can be a beneficial tool but if you are
incapable of paying off the entire balance every single month they can ruin
your life and hopefully the numbers that I’ve shown you today illustrate that
second point if you are only paying the minimum payments on your credit card you
are paying so much more money than you probably realize your annual percentage
rate is just that it’s it’s a number they use to calculate your
interest with daily compounding and the math over a long term does not even come
close to what that number actually is you’re paying so much more than you
actually realize so more of the story if you’re only if you’re only paying
minimum honest honest advice here cut the card up stop using it paid off as
soon as possible and at a future date when you get your finances in line and
you can budget properly and pay off that balance every single month then maybe
think about getting a card again but until then stop because it’s costing you
money it’s costing you tremendous amounts of money with all that being
said that’s the video thank you very much for watching
if you liked what you saw please give me a thumbs up down below if you have ideas
for future videos please leave them in the comments I’m definitely interested
in hearing what you guys think and want to hear subscribe and hit the little
notification bell while you’re at it and as always thank you very much for your
support in your time and have a good day you

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