Financial Know-How
Actual Cost
When you whip out your credit card to buy something, you’re not actually paying the price the store is asking for. You’re actually paying that price, multiplied over time by your credit card’s rate of interest. Even if you pay your credit card off each month and don’t carry a balance, you’re still usually paying interest from the moment you’re charged till the payment clears with the credit card company.
Thanks to the magic of interest, you’re actually using the credit card as an “anti-coupon”!
It would be like saying to the Co-Op, “This book isn’t expensive enough, do you mind if I just add 15%?”
The problem balloons when you have an existing balance on your credit card. Below are some real-world examples of what a purchase can do to your credit card balance:
With $1,000 in debt, paying $100 a month, it will take 11 months to be debt free. You will have racked up $85 in interest.
- Adding a $350 MP3 player adds 5 months of debt and $72 in interest.
- That is a 20% increase over the cost of the MP3 player
Actual MP3 player cost = $422
- Adding an $800 vacation adds 10 months of debt and $207 in interest.
- That is a 25% increase over the cost of the trip.
Actual vacation cost = $1007
- Adding a $1200 television adds 16 months of debt and $369 in interest.
- That is a 30% increase over the cost of the television.
Actual TV cost = $1569
With $5,000 in debt, paying $250 a month, it will take 24 months to be debt free. You will have racked up $920 in interest.
- Adding a $350 MP3 player adds 2 months of debt and $140 in interest.
- That is a 40% increase over the cost of the MP3 player.
Actual MP3 player cost = $490
- Adding an $800 vacation adds 5 months of debt and $360 in interest.
- That is a 45% increase over the cost of the vacation.
Actual vacation cost = $1160
- Adding a $1200 television adds 7 months of debt and $570 in interest.
- That is a 47.5% increase over the cost of the television
Actual TV cost = $1770
With $10,000 in debt, paying $400 a month, it will take 32 months to be debt free. You will have racked up $2,340 in interest.
- Adding a $350 MP3 player adds 1 month of debt and $291 in interest.
- That is an 83% increase over the cost of the MP3 player.
Actual MP3 player cost = $641
- Adding an $800 vacation adds 2 months of debt and $565 in interest.
- That is a 70% increase over the cost of vacation.
- Adding a $1200 television adds 4 months of debt and $825 in interest.
- That is a 68% increase over the cost of the television.
Actual TV cost = $2025
These increases represent actual cost, a figure that makes credit a questionable option for your purchasing needs and wants. Before using credit for anything, consider the actual value and necessity behind the purchase.
While going to Cozumel for spring break with your BFFs may make for a great Facebook profile photo and some amazing memories, it may be hard to justify paying an extra 45% over the cost of the trip to put it on your credit card.
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