Comments on: The Rule of 72 in Reverse – Helping Your Personal Finances

By: barry econ

barry econ — Sat, 21 Jun 2008 15:54:23 +0000

interest on revolving credit is calculated more frequently often daily. Therefore a revolving debt with the same interest rate as a fixed debt will incur more interest and take longer to pay off.

Often if a cardholder is even one day late or does not pay off the balance on a revolving debt interest is charged on the whole amount. For example of you pay $450 off a $500 credit card balance interest will be charged on the full $500.

By: Craig

Craig — Wed, 02 Jan 2008 02:54:12 +0000

both good points, but you specify in your example that both interest rates were 8%
...and daily compounding doesn't make that much difference, you would lump it in with rounding error when you're measuring in years.

By: barry econ

barry econ — Mon, 31 Dec 2007 18:07:31 +0000

I think what I forgot to put in was that car loans typically aren't 19.9%. Actually, maybe it was because credit cards are compounded daily.....Thanks for the eyes.

By: Craig

Craig — Mon, 31 Dec 2007 16:52:13 +0000

While the concepts presented here are sound, the math is atrocious.

$5,000 paid off in $200 payments will be paid off in 29 months no matter whether you're paying your car dealer or your credit card company. It will cost you $488 in interest which is the only part of that example the author got right.

$7,000 paid off in $200 payments will be paid off in 40 months at 5.9% interest at a cost of $701
The 'personal loan' calculations are right, 41 months at a cost of $961.

Revolving debt can be very dangerous, but it refers ONLY to your choice to put more debt on the card. If you are making monthly payments and NOT using the card, then there is no difference in the types of loans.

Take the author's advice and don't keep using your credit card when you're trying to get out of debt, but go somewhere else for help with your math homework.