Paying with a credit card is often more convenient than paying in cash. However, this convenience can lead to reckless spending.
- While credit is very important to the economy, its abuse is harmful. Goods and services are provided on credit with the expectation that they'll be paid for with money in the future. Many impulse purchases are made on credit, with little thought given to how the debt will be repaid in the future. If you calculated the true cost of goods bought on credit, you'd have second thoughts about making the purchase in the first place.
Here's an example. Say a new TV retails for $5,000. If purchased on a credit card with a 12% annual percentage rate compounded daily, and with a minimum monthly payments of $166 paid over three years, it winds up costing over $5,980. Is it worth almost $1,000 extra have it now?
Certainly, there are things that we need now for which we don't have all the cash. As long as we understand the cost of convenience, then credit may be appropriate if cash is not currently available. The key is in knowing that the cash will be available. This allows us to purchase homes, cars, and other goods and services, for which it's just too impractical to wait until we save all the funds needed.
The cost of credit can be greatly reduced by paying off balances promptly. The longer you take to pay off a credit balance, the more it costs you. Stay financially fit, friends.