Purchasing expensive items with a credit card can be hard to resist. Most people see the option of paying $50 per month as very appealing when they don’t have the ability to pay $2,500 for a television now. A monthly payment of $50 may seem very affordable, but what some consumers don’t realize is that they will probably end up paying more in interest on the credit card than for the cost of the television in the first place. A small monthly payment may seem insignificant, but when you take the time to find the true cost of your credit card along with the interest, you may think otherwise.
Let’s look at an example. You decide to go buy that $2,500 television and used a credit card with an annual percentage rate (APR) of 18%. Your minimum monthly payment on the card is $50, and you decide you will only be able to afford to pay that minimum every month.
Before you can calculate your total credit card cost, you should know how that $50 minimum payment was determined. The minimum payment on a credit card is usually determined by using a specific percentage of your entire balance. That percentage amount is usually 2%, but it can differ from card to card. This minimum payment will go toward the interest fees and the original amount you owe. In the case of our example, the original amount is the $2,500 initially paid for the television, and 2% of that original charge is $50.
After performing the formula, you would find that your $50 payment each month would be divided in two: $37.50 for interest and $12.50 toward the original debt. Finding these numbers takes three steps. First, you divide the APR of 18% by 360 days of the year, which equals .05%. Then, multiply .05% times 30 days in the average month, which is 1.5. Finally, multiply 1.5 times the original debt of $2,500, which equals $37.50 in interest. After the first month alone, you will still owe the credit card company $2,487.50. From there, you can continue the formula to figure out the cost of interest for the second month. The only difference is that you put in your new debt owed ($2,487.50).
If you continue this process, you will figure out that paying only 2% of your total balance due every month will cause you to take 334 months to completely pay off your debt. In other words, it will take you 28 years to pay off the $2,500 purchase for a television. Most televisions don’t even last that long. Also, at this rate, you will have paid a total of $5,897 in interest, so the true cost (interest paid plus the original amount) will be $8,397.
If all of this number crunching is too confusing, or if you want to make sure your calculations are correct, there are a number of websites out there that have true credit card cost calendars you can use. They are incredibly easy as well because all you have to do is fill in the blanks they provide. Simply search for “true credit card cost calculator” in any search engine you prefer, and the rest will be easy.
If you are thinking about buying something with your credit card, make sure you understand how much that item will really cost you in the end if you don’t pay off your credit card at the end of the month. Know your limits before you make the decision to swipe your card, and remember that even the most inexpensive item could end up costing a lot more because of interest.