The Cost of Financing

Most people understand the concept of a mortgage - You borrow money to buy a house and typically pay it off over the course of 30 years. Interest rates are generally low, around 5-7%. Over the long haul your house should appreciate in value and at the end of the loan you own a valuable asset.

Credit cards are different. They are revolving lines of credit with significantly higher interest rates. Even small purchases can take years to pay off when only paying the minimum payment due each month. Here is an example of the true cost of financing with a high interest credit card:

New 52-Inch HDTV Cost: $1800 Interest Rate: 18% Minimum Payment: The greater of 2% or $15 Initial Monthly Payment: $36

Paying the minimum payment due each month (assuming 2% of the balance with a $15 minimum) would take you 268 months to pay off the debt and cost you a whopping $3,797 in interest payments alone.

Increasing your monthly payment to $100 each month would reduce your debt to zero in 22 months with total interest payments of $314.

As you can see in the example above, simply paying the minimum payment due each month will end up costing you a fortune. Increasing your monthly payment has an exponential effect on the time it takes to pay off the debt and total interest paid.

The next time you plan on making a purchase on your credit card, be sure to have a payment plan in mind.