Knowledge is Power

Ok, I just ran across a little tool that might help you as you are planning your fight against indebtedness. And surprisingly enough, it is on the Federal Reserve site.

To use it, you just enter the balance and interest rate and the calculator does the rest. It isn't foolproof, but it comes close. I tried it with several of my accounts and it was spot on on some and a little off on the others, but it does make a great planning tool.

It is not a set in stone type of thing because cards set minimum payments differently. Some charge as little as .5% of the balance plus finance charges, while other may require up to 2% or more of the balance plus finance charges. The calculator uses an industry average to determine the minimum payments. If the minimum payment listed is larger than yours, then the pay off time frame will be too short and if it is larger than yours, then it will be too long.

Probably the best option is the one where you enter the amount of time you want to pay off the card in and it tells you the monthly payment you have to make in order to do that. If you are serious about getting out of debt, this is the option you should be pursuing anyway. For example, a card with a balance of $11,400 and an interest rate of 7.95% would take roughly 20 years making the minimum payments, but by making a monthly payment of $516 you could accomplish the same thing in 2 years.

An interesting feature is the interest payback calculation that automatically displays. Taking the same balance of 11,400 paid with minimum payments, the interest paid would be $5,371. Paying it off over 2 years would reduce the interest payment to $968.

Perhaps the best use of this calculator would be to run the numbers before you finance a large purchase on it and see just how much it will really cost you, in money and in time spent slaving to pay it off.