Wednesday, July 15, 2009

The High Cost of Credit

Since our goal here is to save money I want to focus on all the different ways we can cut back. One item in our budget that can be costly, both financially and emotionally, is credit card debt. It's an absolute energy & resource drain. I think if we all had a clearer understanding of just how much purchases on credit cost us we'd be less inclined to pull out the plastic for anything we can't afford to pay off at the end of the month.

Let's look at an example...

Let's say you score a fabulous deal on the 50 inch plasma TV you've been dreaming about. You make your purchase on plastic for a total of $2,000 and your card has an 18% interest rate. You decide you can only make the minimum payment on it and the minimum payment is 2% of the debt or $40.00 that first month. If all you ever make is that minimum payment it would take you over 30 years to pay of that TV! And the TV would have actually cost you just under $8,000!!!! Not much of a bargain is it. Of course that's if you are never late on your payment in 30 years and never make it up to the default rate which is often as high as 33%!

Would you have bought the TV if the price on the sign had read $8,000?

Credit cards can be useful tools and you need them to rent a car, shop on-line or make a hotel reservation. They can also be useful in a real emergency. However, if used to subsidise purchases you can't afford or to live a lifestyle beyond your means they can force you into a life of indentured servitude.

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