Understanding the Mathematics of Personal Finance

# A BANKRUPTCY SPIRAL

Table 6.5 shows a month-by-month account of how things can go very, very, wrong. In doing the calculations, I’m just looking at monthly updates—I’ll assume that you

Table 6.5 A Credit Card Disaster

 Month Balance (\$) Interest (\$) Tot Int (\$) Pmt \$200.00 0 254.50 2.00 2.00 Charge \$450.00 1 511.55 7.05 9.05 2 771.16 5.12 3 1,033.37 7.71 4 1,298.21 10.33 5 1,565.69 12.98 6 1,835.84 15.66 27 8,176.86 78.44 28 8,513.12 81.77 29 8,852.75 85.13 30 9,195.78 88.53 31 9,542.24 91.96 32 9,892.16 95.42 33 10,245.58 98.92 34 10,602.54 102.46 35 10,963.07 106.03 36 11,327.20 109.63

pay your bill at the end of the billing period and make your purchases on the first day of the billing period.

Suppose your new credit card purchase interest rate is 1% per month. In your budget, you see that you can pay \$200 a month toward your credit card bill. Unfortunately, the lifestyle you have chosen requires \$450 a month in purchases.

At first, things don’t look so bad. You’re only paying a few dollars a month in interest, and look at the purchases, restaurant meals, and vacation trips you’re getting. What’s so terrible?

What is so terrible is what’s creeping up month after month and is about to explode. Look at payment 33: At that time you’re paying almost \$100 each month in interest.[19] Half of your payment isn ’ t buying you anything. Your balance has exceeded \$10,000. That’s a lot of debt. Your card is probably “maxed out,” that is, you have the maximum balance that your credit card company will allow, and your ability to charge new purchases is cut off.

Now you have a useless credit card and you’re \$10,000 in debt. What are you going to do? If you’re really financially suicidal, you’ll transfer the balance to a new credit card with a higher debt limit and for a short while, once again, go on your merry way.

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