Interest Rate Calculation Canada

To follow up on my post about Teaching kids about Credit  I will expand point 2 which was.

  • Teach the child how interest rate is calculated. It is my opinion that children should be given an example of how much a shirt can cost them, or how much a tank of gas actually costs over time.

To Expand on this I will use $1000 , and 19.99% interest rate. 

In my opinion it would be important to teach a child that borrowing $1000 on a credit card, while making just the monthly minimum payment($10) would cost them $989.53 in interest alone. This would mean that to borrow the $1000, they would be paying back $1989.53 total. The time that this would take is 10 years and 11 months.  This is assuming that the credit card is not being used while paying off the balance. It is important to know that paying just the minimum monthly payment on a “maxed” (fully used limit) credit card is not considered good credit management. Minimum monthly payment is calculated at $10 or 3% of balance(whichever is greater).

Lets just say that based on the above limit of $1000 at 19.99%, you decide to pay an additional $10.00 per month on the credit card. The interest alone would be $446.83. This would mean that the total paid back would be $1446.83. It would take 4 years and 8 months to pay this back. This being said, the time saved versus just the minimum monthly payment of $10 would be 6 years and 3 months.

Based on the above examples, lets just look at an average entry level at a restaurant job paying $10 an per hour worked. Lets just say that the a person would work 30 hours per week at this job. This is a total of $300 a week. With 52 weeks in a year, that would be $15600 a year. 12 months in a year, this would be $1300 a month. Of course tax would be taken off this amount of $1300. Lets just say 18% tax. This would leave $1066(net) to be used for spending. This would be very close to the $1000 credit limit that would need to be paid back. Of course a person wouldn’t spend their complete earnings on credit card debt, so most would pay the minimum payment. From this example you can see how easily it is to get into debt and get trapped in 11 year plan of paying it back.

I am not posting this information to scare people into not getting credit. I am merely trying to expose the true cost of borrowing. I would like to think that the education system could find some small time available to be a part of the solution, and not the problem.

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Next time we will talk about credit terminology and what it all means.

Just my 2 Cents

-M

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