The True Cost of “Charge It”

Thinking of buying another electronic appliance for the house?  Maybe even putting the new purchase on a credit card?

Well, if that credit card carries a 19% interest rate, here is some valuable information you cannot afford to ignore.

Let’s say the purchase you plan to make comes to a grand total of $1000.  You charge it thinking you’ll pay this item off before long and, let’s face it, when it comes to saying “charge it”, it’s too easy.  However, when it comes to paying the debt off quickly, we are all rather reluctant to part with our cash, and instead opt to make the minimum payment without giving too much thought to the interest that will accrue over time.

Let’s do a time line regarding the interest you will be paying on that $1000 charge you just made.

  • After one year of making just minimum payments of around $20 per month, you will have paid approximately $185 in interest.
  • After two full years of making minimum payments you will have paid approximately $358 in interest.
  • And, after three full years, or 36 months, of minimum payments on your now 3 year old appliance, you will have paid almost $516 in interest.  And, the bad news:  your item is not even half paid for yet.
  • After four years of making payments you have paid $656 in interest.
  • Now, five years later, you have paid $775 in interest.
  • Moving ahead to 8 years, the total interest paid comes to $952.  You have paid almost an additional $1000 to borrow $1000!  Your purchase is finally paid in full but it is 8 years old.

A better way to pay is with cash.  Plan ahead and make a list of items you think you would like to own over the next year.  Then decide how much money you will need to put aside with every pay check in order to have the cash for the purchase.

There are 52 weeks in a year.  If you are paid weekly you will have 52 chances to put aside a specific amount of money to get to your goal of $1000.  Actually, you will need to put aside an amount of $19.24 from each weekly pay check.  You need to put less than $20 aside each week in order to make that $1000 purchase.  You can do it.

Once you put your plans on paper and look at them carefully, you can easily see that it can be done.  The best part is that it can be done without the use of a credit card.  No interest to pay out and a great feeling of accomplishment because you have disciplined your financial self to pay for an item when you can afford it.

Use your credit card when you know you can pay off the total balance due at any time and you still have plenty of money left for food and gas and housing.  Live and spend responsibly.  You will feel a kind of financial freedom most people only dream of.  It’s a six letter lifestyle:  BUDGET.