Credit Card Calculations

Tried crunching some numbers using a spreadsheet. At a monthly interest of 3.5%, and assuming you only borrowed money at the beginning, and only paid the minimum payment per month (here, assumed at 4% of the outstanding balance), it would take 77 years for you to reduce the borrowed amount by 99%. 77 years to nearly pay-off the original money you borrowed. It takes more than the average lifespan of a human being to pay-off a debt. And by that time, the bank would have earned about 693.18% or nearly seven times the amount you initially borrowed off monthly interest charges.

Also, during the first year, the bank would have earned more than 40% of the borrowed amount just because of interest charges, and you would have only reduced the balance by roughly 6%. Compare 40% with 0.1%, the annual interest rate that depositors charge banks to lend the banks their money. That gives the bank a net profit of 39.9% by simple being the middle man.

By the second year, the bank has already earned about 80% of the borrowed amount via interest charges and you would have only reduced the outstanding amount by 11%.

The lesson here is that it's unwise to only pay the minimum required payment per month. Try to reduce the outstanding balance to zero by the end of every month if you want to utilize a credit card effectively. Otherwise, you are better off with cash because credit card interest rates are oppressive. I would advice my friends against using credit cards at all.