Knowing the costs of borrowing money
When you borrow money, whether it’s in the form of a credit-card purchase or a student loan, you're responsible for paying back the initial amount you borrowed plus interest. Depending on the interest rate, this debt can add up quickly, especially if you're only able to pay the minimum amount required by the lender.
For example, let's say you have $3,000 in credit-card debt with an interest rate of 18%. You don't want the temptation of a credit card any longer so you call the bank, close the account, and cut up the credit card.
You never add to your original debt of $3,000 and you pay the minimum required payment each month. Let's say that's $60 per month. At that rate, it will take almost eight years to pay off the original debt, and you also will have paid another $2,580 in interest.
Is it worth it to go into debt to buy something that might be gone, used up, or thrown away long before you pay it off using credit?
For more examples of how long it can take to pay off a $1,600 credit card balance by making the minimum payments, see Paying the Balance Monthly.
To figure out how long it will take you to pay off your credit card or loan debt, use the online financial calculators in the "Do the Math" column.