What The Credit Card Companies Don't Want You To Know
Before you sign that offer and run out to purchase your new TV, let's look at the math and see how long it will take you to pay off this purchase at $40 per month, what you'll end up paying in interest, how long it will take to pay off the balance, and the total amount you'll end up paying for your $2000 TV.
The minimum monthly payment on most credit cards is usually calculated as a certain percentage (often around 2 percent) of your total balance. Remember, however, that this payment includes interest as well as payments against the principal amount that you borrowed.
On the $2000 TV, 2 percent of the balance is $40. At 18 percent interest, your $40 payment would include $30 in interest and only $10 towards the amount you borrowed (18% divided by 360 days = .05% per day times 30 days in a month times $2000 outstanding balance equals $30 in interest).
If you pay the minimum balance each month (calculated as 2% of your outstanding balance), it will take you over 30 years to pay off your $2000 TV, which will be gone long before it's paid for. What's worse, you'll have paid nearly $5,000 in interest. The $2000 TV will have cost you nearly $7000!
To make matters even worse, think of what you would have earned if you had simply put $40 a month into an investment earning a conservative 8 percent for the same number of years (30). Your $40 a month would be worth over $60,000 and you would have earned almost $46,000 in interest on your investment.
Many people get caught up in credit card offers that are "too good to pass up." The question is: "good for whom?" Certainly not good for you. The example of the TV purchase illustrates the extremely high cost of paying the minimum balance on your credit cards.
Educate yourself about the true cost of credit and the ways some credit card companies entice you to get deeper and deeper in debt. A great source for information on credit and debt is About's Credit/Debt Management site.
To see for yourself the true cost of credit on your own credit cards, check out the Minimum Payment Credit-Card Interest Calculator, which will tell you how much interest you'll end up paying if you make only the minimum required payment on your credit card bill, and how many payments it will take to pay off a purchase, assuming you don't make any more purchases with the card. It's a real eye-opener.
To find out how much you'd earn over the same period of time by investing the amount of the monthly payment, see the Future Value Calculator.
Credit definitely has its place, but using it unwisely can cripple you financially.
