Know the true cost of credit cards.
Credit cards have always offered great benefits, plus they can not only stop with or without cash, they can also help build and establish a strong, positive credit history.
But, it is important to understand the true cost of credit cards when you factor in interest and fees.
Using credit can be less convenient if it means paying more for purchases over time when interest is factored in. This is how the true cost of credit can add up.
It is a common mistake for most people to get in the habit of paying only the minimum amount due on their credit card bill. Paying only the minimum means it takes longer to reduce your balance.
Meanwhile, interest continues to accrue steadily on what you owe. If the interest rate is excessively high, your minimum payment may not even be enough to cover the interest charges for the month.
A minimum payment is usually determined using a percentage of your total balance. The percentage amount is usually around 2%, but can vary, depending on the card. Note that the minimum payment goes toward the interest charge and the original amount you owe. In this case, the original amount was $2,500.
If you were to pay only 2% of your total balance due each month, it would take 333 months to pay off your debt. In other words, it would take almost 28 years to pay off a $2,500 liability. The television would probably have stopped working long before he paid it off.
Even if he decided to pay it off for 28 years, he would also have paid $5,896.48 in interest. His true cost for the television would end up being $8,396.48.
When you look at the true cost of credit in that context, it becomes easier to see how dangerous the minimum payment trap can be. You may be saddling yourself with long-term debt for things that lack staying power. At the same time, you may be doubling or, in the case of the TV, tripling the cost of the purchase by paying interest charges.
There is another way to look at interest, and that is in terms of how it can help you grow your money. That is, what you could have earned if you had put the $50 in a savings account for 28 years. Even at today’s low rates, it would have been a substantial amount.
For example, suppose you started a brokerage account with a 5% rate and deposited $50 each month for 28 years. Let’s also account for what you would have paid in taxes at a 25% rate on the income generated.
Many people are tempted by credit advertisements and offers that are too good to be true. However, when you look at the long-term consequences, monthly payment offers will generally cost you a lot more money and a lot more headache.