Suppose I have an $8000 credit card and an $8000 bank loan. They both have the same interest rate of 14.4% AND they both have the same payment of $220.
You would think that these two loans would get paid off at the same time, but that would be very wrong.
By the time you pay of Credit Card, you’ll have spent $3300 more in interest than you would have using the bank loan.
WHY IS THAT?
- Is it because credit cards are more convenient?
- Is it because credit cards are revolving loans?
So lets explore…
Most people are aware that when you take the more convenient choice… you pay more. It’s more convenient to go to a gas station than it is to visit the grocery store, but the prices are almost double for the items there. Whenever you shorten the length of time to do something, you pay a premium to do so.
So what makes a credit card more convenient than a bank loan? Well… it’s an easier application process for one. You fill out a pamphlet and give it to the bank teller, or you do it all online. Then you get your answer in the mail. Applying for a bank loan is not convenient at all. You have to go to the bank and sit with the loan officer and if feels like begging.
With a bank loan, once you pay it down, you can’t just borrow more money unless you go through the loan process again to get another loan. With a credit card on the other hand, you can pay it down and charge it up again without every having to apply.
This is called revolving credit. You can pay down and charge up your credit line. You can borrow, repay, borrow again, and repay as often as you like without the hassle of creating new paperwork. Revolving credit is a cool idea and it’s a convenient idea, but it is a COSTLY idea!
Here’s why:
A bank loan has a fixed payment schedule. In the case of the loan above, an $8000 balance will take 48 months to payoff with a payment of $220 and an interest rate of 14.4%.
The credit card with the same numbers will have a payment of $220 as well, but ONLY for the first month! The second bill has a payment of $217 and the third bill has a payment of $214.
It’s called a Decreasing Minimum Payment. Because you pay less and less each month, it takes you longer to pay off the bill AND it costs you more money in all. In fact, this loan will take 202 months to pay off and costs $3300 more in interest charges. This is true even if you are never late and interest rates never go up.
This is a big problem with an easy solution. You can pay off a credit card just as if it was a bank loan simply by keeping your payments the same each month. Whatever you are paying today, just keep paying it until your balance is $0. It helps to pay more when you can… but definitely DO NOT just pay the minimum payment they send you. Minimum payments are ineffective and do not put a dent into your balance.
With this strategy, you can pay off your credit cards faster and save a lot of money.
For a more comprehensive look at this subject please check out this report:
Credit Card vs. Bank Loan
Also… the strategies listed in this article and in the report are just a FEW of the strategies included in the Debt Elimination Engine found here:
www.DebtFreeInnerCircle.com
And finally… here is my Debut Podcast on iTunes. Feel free to comment below.
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