Anyone explain Martin's minimum payment figures

Angie8

Just been showing someone Martin's article on the dangers of minimum payments.

http://www.moneysavingexpert.com/cgi-bin/viewnews.cgi?newsid1095079865,8297,

Can anyone explain where the minimum payment figures come from? Month 1 is £60, month 2 is £59.60. Is this right, I can't seem to get the month 2 figure.

I'm probably just tired but can someone please explain exactly how it's calculated? Or is Martin just rounding up for simplicity (in which case it takes quite a bit longer to pay off the card).

How much you’d actually be paying off
£3,000 debt at 14.9% minimum payments 2%.

After Minimum Payment

1 Month £60

2 Months £59.60

12 Months £56

YorkshireBoy

Start with the opening balance, add the months interest at 1.167%, and then take away the 2% minimum payment. The figure you now have is the opening balance for the second month. Repeat for subsequent months.

To see a table of balances and payments, run Martin's example through the credit card calculator at http://www.whatsthecost.com/creditCard.aspx

Angie8

Cheers, just tried that.

The calculator agrees with my figures. The difference is only 6p less than Martin's calculation but using Martin's figures adds around 8-10 years onto the time required to pay the card back.

The monthly interest on Martin's example is 1.242%.

I think he may be using the wrong percentage....

Detail_Merchant

Hi Angie8,

I can't see your monthly figure 1.242% anywhere in Martin's article.
Did you get it by dividing 14.9% by 12?
If so that might be the cause of your confusion.
To get a monthly rate from an annual rate you need to take account of compounding by taking the twelfth root, rather than divide by 12.
14.9% is changed into 1.149
Then
1.149 ^ (1/12) = 1.01164 (approx.) which is 1.164%
I guess YorkshireBoy got the figure 1.167% directly from Egg.
Although this is more, it may still be consistent with an annual 14.9% to 1 decimal place.
1.01167 ^12 = 1.14938, which is 14.9% to 1 decimal place

Month 1:
Brought forward = £3000
Interest = £3000 * 0.01167 = £35.01
Minimum payment = £3000 * 0.02 = £60
Carried forward = £3000 + £35.01 - £60 = £2975.01
Month 2:
Brought forward = £2975.01
Interest = £2975.01 * 0.01167 = £34.72
Minimum payment = £2975.01 * 0.02 = £59.50
Carried forward = £2975.01 + £34.72 - £59.50 = £2950.23

However this is a few pence different from Martin's figure, as you say.
I've played with a spreadsheet, and I can't get close to Martin's figures for the later on time periods, 5 years and more, without increasing the interest rate.

Working backwards £59.60 minimum payment in month 2 implies a balance of £2980 (59.60 ÷ 0.02). Since the balance was £3000, and the payment was £60, this implies the interest was £40. £40/£3000 gives a monthly rate of 0.0133333, which equals 16% if you just multiply by 12, or 17.227% if you raise it to the power of 12 to account for compounding.

By using this rate, the minimums agree for longer (I assume that Martin is rounding them up to the next pound). However, my figures still disagree after 240 months, where I get £12.15 minimum, Martin says £14.

Possibly he is also applying a rule whereby the interest is rounded up to the next multiple of 50p or a pound. I can get figures fairly close to his by doing this.

Maybe we should ask Martin to show his workings!

I hope this helps,

Detail Merchant

Angie8

Thanks for the replies - I was indeed simply dividing 14.9 by 12 which partially explains the problem. As you say though, even the corrected figures still don't tally with Martin's.

I noticed another problem in the article which may have some bearing. The card Martin uses as his example is 14.9% at the beginning of the article, however, it changes to 17.9% near the end. I wonder if Martin is accidentally interchanging the 2 rates?

As you say it would be nice to see his calculations and then we can see exactly what's going on!

MSE_Martin

I'll take a look when i've a moment