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By Garry S. — Published May 22, 2018
Credit cards are a booming business. The convenience that they offer is unlike anything else in the financial world. Buy something you have your heart set on now and then pay for it in small installments over time, seems like the best invention since sliced bread. That little piece of plastic with its sleek magnetic strip and EMV smart chip has been the delight of many shopper and opened up a whole new world of possibilities.
However, there is a flip side to this story and it is not the most pleasant one out there. The harsh reality is that nothing comes free and while credit card companies might make offers that are too good to pass up there are always hidden costs. It is not hard to overspend using a credit card and sometimes we find ourselves unable to pay the full amount on our bills. Again we are given the option of minimum payment which we gladly make use of but only to accumulate debt in the long run. Let’s take a closer look at how the cost of a credit card builds up over time if we are not careful.
What credit cards really cost
Let’s say you’ve been using your credit card regularly during the month and then you see the latest MacBook Pro that you absolutely must have. The price of the MacBook is $2500 but there is a credit card payment plan that lets you pay $50 now and the rest over a period of time. You opt for the scheme and are happy to have a brand new MacBook Pro for just $50.
You get your credit card bill and with all you spending combined you realize that it is a bit higher that you expected and you really can’t pay off the full amount right now. So, you pay the minimum amount with the intention of paying off the debt as soon as you can. You get your salary and pay your utility bills and suddenly there’s not that much left and paying off your credit card would place you in a very uncomfortable situation. You decide that there is no hurry and you will clear the payments as soon as you can.
But what you haven’t realized is that now you are paying interest both on the MacBook payments and on your credit card bill. Over time the interest gets added on to your total payment and you actually end up paying a lot more than $2500 for the MacBook.
The minimum payment credit card is usually about 2% of the total amount for which a small percentage goes into paying the installment on your MacBook payment plan and the rest to paying your overall credit card bill. If you consistently keep paying only the minimum payment on you bill you are only adding to the interest you owe. If your interest is around 18% of the amount owed then $38 of your $50 will go towards interest payments while $12 goes towards payment of the MacBook. At this rate it will take you over 330 months to pay the full amount on your MacBook.
Using the formula:
18 (%) ÷ 360 (days) = 0.05 (%)
0.05×30 (days) = 1.5
1.5×2500 ($) = 3750 ($)
You can find out the final amount you actually end up paying for the MacBook when you include interest rates which is this case is 3750. The final amount works out to a whole $1250 more than the original price.
If you want to avoid the hidden costs involved with credit card purchases first try and pay the full amount on your bill every month. You could also try to use cash or debit card payments to be better aware of your spending.