Editor’s note: The Fed calculations are correct assuming a 3% minimum payment, as commenters have pointed out below. The Fed’s website only refers, however, to a $90 minimum payment. Call it a miscommunication, not an error.
It has long been common knowledge that politicians of all sorts and across party lines are poor at basic arithmetic. Until the depths of the financial crisis became apparent, the general public had a much better opinion of the aggregate finance & maths skills of the Federal Reserve and the US Treasury. But with QE2 looming upon us on November 3rd, the public’s confidence in those officials who are in charge of our public finances has deteriorated to a new low. It gets worse though; just how bad the situation really is can best be explained with an example.
I recently embarked on a new pet project to write a book on financial literacy for kids and came across an interesting website during my research.
This is the official site of the Federal Reserve with online information and useful tips in view of these new credit card rules.
You may have seen some of the effects of the new rules on your credit card statement already. Among other disclosures about late payments and fees, a box prominently shows how long it would take to pay off a credit card balance if one was to make only the minimum payment. The example given calls for a balance of $3,000 at an interest rate of 14.4%. Trouble is, the calculations are wrong and they are off by much more than just a few cents.
If you were to run these interest calculations via a spreadsheet or financial calculator, it would show that a credit card balance of $3,000 at 14.4% interest can be paid off in about 3 1/2 years (42.8 months) at a total interest cost of $854. Instead, the official Federal Reserve calculation suggests it would take 11 years at an interest cost of $1,745 resulting in a total payment of $4,745 (see below).
Equally disturbing is the fact that the Fed offers an online payment calculator again with incorrect results.
For the sake of the consumers who rely on this type of information, I would hope that this message is somehow communicated to the responsible department at the Fed. While this should be an easy fix for a web developer, the whole experience left me with a chill going down my spine. If the Fed’s calculations or systems of checks and balances were equally poor when it pertains to the handling of yet another $ trillion worth of debt, rational investors would have to come to the conclusion that a run for the proverbial (US$) exit door must be the only way to salvage what can still be salvaged. Implying the same level of competence on the implementation of the Dodd-Frank Wall Street Reform Bill should leave us all with a sour taste in our mouth.
Good luck and good investing (in US$ alternatives) !