These days, people just buy, buy, buy with the belief that as long as they make minimum payments on their credit cards, they’ll be OK…but I beg to differ. Yes, if you are making minimum payments on your accounts, your credit score won’t be negatively impacted and you’ll look decent on paper. The good thing is that you can avoid late fees, and you won’t be reported as delinquent to the credit bureaus.
However, you pay a very hefty price for paying just the minimum, and I’m sure you know what that is – interest. That is how credit card companies make money off of you. When you make only minimum payments, a significant portion of the money goes towards interest and finance charges.
Consider this example. You’re out shopping when you see it…the 70” big-screen 3D TV that you’ve been eyeing for months. The only problem is that even though it’s on sale, it’s still way out of your budget (We’ll assume that you have one.). You’re probably thinking to yourself, “How much could it hurt to purchase this one item on credit?” Besides, it can be an early Christmas present to yourself.
Well, let’s do the math. The TV costs $2,500, and we’ll estimate your minimum credit card payment as 2% or $50. If your credit card has an annual percentage rate (APR) of 18%, your $50 payment would cover $37.50 in interest and $12.50 on your $2,500 liability. After you make your first payment, you still owe $2,487.50.
Here’s the breakdown:
- Divide the APR (18) by 360 days (12 months x 30 calendar days). That equals .05 (5%).
- Multiply 5% by 30 calendar days. That equals 1.5%.
- Finally, multiply 1.5% by the original balance ($2,500). That equals $37.50 in interest.
If you pay only 2% of your total balance due every month, until the TV is completely paid off, the real cost comes out to a whopping $8,397, with $5,897 in interest alone! Not only will the TV cost you over 3 times more than the original purchase price, it will also take you 3 decades to pay off!
If the TV costs $8,397 upfront, would you still buy it? Probably not! For that price, you could get a nice used car! However, when you charge it to your credit card and make minimum payments, you’ve pretty much agreed to pay the outrageous amount. I’ll bet that TV won’t seem quite as appealing anymore.
Although fulfilling wants is immediately gratifying, it isn’t worth the headache and hassle of impending financial troubles. If you have credit card debt, know that you have the ability to turn things around. It’s really just about making wise money decisions.
The next time you wish to make a purchase with your credit card, ask yourself if you have the means to pay it off in full and on time. If the answer is no, figure out what the “real cost” of the item is and determine if it is still worth buying. Sometimes, delaying short-term gratification for long-term financial stability is one of the best decisions you can make for your financial future.