The Cost Of Credit

Thought for the day: Money and the appearance of money are two completely different things.

Ever know anyone who always has the nicest, newest things and you wonder where they got the money? You know the guy is not making that much money managing a Wal-Mart, but he's driving a relatively new Lexus.

We'll call him Joe. Joe bought his Lexus two years ago for $30,000.00 on a five year loan. He got a good deal at only 4% and his payments are $552.50 per month. In five years Joe will have only paid $3,150.00 in interest, not bad for such a nice car.

BUT, Joe has been shelling out over Five hundred dollars a month to drive to his job at Wal-Mart for five years! Wally World pays him $30,000.00/ year which means that each month he is bringing home about $2,000.00. His mortgage payment is $850.00. His utilities run on average $150.00/month. He spends about $250.00/month on gas and groceries (Joe is single and doesn't go anywhere but to work). Joe is also trying to pay off a credit card that has a minimum payment of $265.00.

Even if he doesn't ever eat out or spend any money on entertainment, Joe is coming up well short every month. So he picks up some overtime hours at the 24-hour superstore and starts making an extra $500.00 a month. That's what he uses as his "fun money." Unfortunately, if Joe wants to have any fun in the future he can't afford to spend that extra money now. He is still paying just the minimum on the credit card and let's look at what that is costing him.

This example is from Math.com...
"Credit card minimum payments may seem convenient on the surface, but only making the minimum payment each month can be quite costly – and, it can take you several years to finally get your credit card paid off.

"Let’s say you have a $7,000.00 balance on a credit card with a 24.500% APR. If your minimum payment is $265.00 and that is all you pay each month, it will take you 15 year(s) and 6 month(s) to finally get that card paid off (assuming you don’t add anymore debt to the balance). You will have also paid $14,814.72 in interest alone."

Maybe Joe should have bought a used Honda. Gas mileage is great and he had the cash at the time to pay the full price. He would have gotten a better deal because he had cash and for $552.50/month Joe would have never had to carry a balance on his credit card. The Honda may have died after fifteen years of use, but Joe would have had $18,000.00 IN the bank drawing interest instead of having paid $18,000 TO the bank in interest. Eighteen grand will still buy a reliable ride.

Referring back to an old post - Think long term. Ask yourself what is the cost of the credit and make a small sacrifice now. You'll thank yourself later.