While we’re not in the credit improvement business, credit is an essential piece of the financial puzzle. We all have a credit score, and that score can make or break opportunities. Helping clients to have a better understanding of their credit usage and consumer debt can not only improve their credit standing over time, it can help them save money and have better overall financial health. Thus, we have the Revolving Credit calculator to help us simulate various types of revolving credit a client may have.
Using Revolving Credit
The Revolving Credit calculator is fairly straightforward, allowing you to assess different repayment strategies as well as the opportunity cost of such strategies. To begin, input the client’s age and how long you want to illustrate for. We’ll put 30 years for now, since we don’t anticipate them being in debt for life. Let’s say this client has three credit cards, so we’ll toggle those on now, and you can actually input up to 10 accounts. When you do that, you’ll see the following:
Next, we want to include information about each of the credit cards. Loan Balance is where you’ll put how much of the credit limit the client has used, Rate is for the card’s interest rate, and Payment is whatever the client is paying on the card currently. Finally, CC Fee represents any sort of annual fee for the credit card. You can also include the credit limit, and whether you want to cancel the credit card once paid off.
You can also toggle on/off options like “Continue Payments to Remaining Debts.” For now, we will toggle that off and assume that once the client pays off a card, they will choose to use that cash flow instead of continuing to put it toward debt repayment. Here’s what our imaginary client’s credit card usage looks like:
As you can see, their current “plan” lands them at about 18 more YEARS paying down credit cards. While two of the cards can be paid off in 5 or 6 years, that second debt is persistent, even though it’s the highest priority card to pay off if you’re choosing to pay down according to highest interest rate. (You can change this in the dropdown list next to “Payoff Order”.)
So what happens if the client DOES use any remaining payments to pay off their balance? Here’s what happens when we toggle that option on:
Now, all of the client’s credit cards can be paid off in 6 years. This simple shift shows just how powerful it is to do a debt snowball or avalanche method, rather than treating each debt like a separate problem.
You can also choose to add additional monthly payments. Let’s say that the Monthly Payments above are only the minimum payment on each card, yet the client has a little bit of additional cash flow to contribute. If you put this additional cash flow into “Additional Monthly Payoff,” it will automatically apply that cash flow in order of the payoff you have specified. This makes it simple to keep track of what the client HAS to pay vs. what they CAN pay, and better demonstrates the difference between various repayment strategies.
If our client wanted to continue with their current repayment strategy AND add $100 of cash flow to that each month, here’s what it would now look like:
As you can see, with just $100 more a month, the client can shave another year off of their credit card payments, saving them more in interest costs. So, what would it look like if they did all of that, and instead started by paying off the largest balance rather than the highest interest rate? As you’ll see below, the results are actually very similar.
Comparing Revolving Credit Paydown Methods
As mentioned above, you can also change the priority of the paydown by selecting different options from the dropdown menu next to “Payoff Order.” Additionally, you can click Compare to show a cost breakdown of the different options. This is great for more visual learners who don’t want to study a chart. Here’s what it would look like if you compared a high balance payoff (on the left) to a high interest payoff (the right), WITH continuing payments to remaining debt:
As you can see, there is actually VERY little difference between these two methods, at least in this particular example. In an instance like this one, the ideal choice is going to be the one that’s easiest for the client to stick to. (Though, there’s also very little quality of life difference between the two repayment options.)
For further insights, you can include the Opportunity Cost of paying off debt vs. saving, which we’ve done above. Again, the opportunity cost between the two options is negligible in this case, yet that might not be true in every scenario. Play around with comparisons to find the ideal solution for your client.
Try it Today
Want to add value to your client’s life today? By downloading a Free Trial of the Truth Concepts software, you can access the entire suite of calculators for 30 days. Meaning that in just 30 days, you can learn just what tremendous value you can give to your clients with our software. You can help a client come up with a debt strategy as soon as today.
