The True Cost of Credit Card Purchases

June 25, 2012

You only live once, so you might as well enjoy yourself, right? If you work hard and want nice things, why deny yourself? In this age of credit, it seems like you can have it all – live large and be in charge. But that’s just the thing…you’re not really in charge, not when you’re carrying a significant amount of credit card debt.

But what’s so bad about having debt you ask? Well for one, you’re not exactly in control of your finances. If you let the problem get out of control, it can really come back to bite you. Although fulfilling wants is immediately gratifying, it isn’t worth the headache and hassle of impending financial troubles.
Not convinced? Even if you’re not thinking that far into the future, take a look at the true cost you’ll pay, if you leave a remaining balance on your credit card. It might make you think twice before going swipe happy on things you don’t need.

Purchase Price vs. Real Cost

Picture this. You’re out shopping when you see it…right there in front of you is the gorgeous, covet-worthy Prada bag you’ve been eyeing, and now you desperately want it. The only problem is that it’s way out of your budget (We’ll assume that you have one.). You’re probably thinking to yourself, “how much could it hurt to purchase this one item on credit?” Besides, you never buy nice things for yourself.
Well, let’s do the math. The designer purse costs $2,500, and we’ll estimate your minimum credit card payment as 2% or $50. If your credit card has an annual percentage rate (APR) of 18%, your $50 payment would cover $37.50 in interest and $12.50 on your $2500 liability. After you make your first payment, you still owe $2,487.50.
Let’s break it down:

  1. Divide the APR (18) by 360 days (12 months x 30 calendar days). That equals .05 (5%).
  2. Multiply 5% by 30 calendar days. That equals 1.5%.
  3. Finally, multiply 1.5% by the original balance ($2,500). That equals $37.50 in interest.

If you pay only 2% of your total balance due every month, until the purse is completely paid off, the real cost comes out to a whopping $8,397, with $5,897 in interest alone! Not only will the bag cost you over 3 times more than the original purchase price, it will also take you 3 decades to pay off!
Think about it. If the purse costs $8,397 upfront, would you still buy it? Of course not! However, when you charge it to your credit card and make minimum payments, you’ve inadvertently agreed to the outrageous amount. I’ll bet that Prada bag won’t seem quite as appealing anymore.

Tackle Credit Card Debt

If you’ve already racked up some credit card debt, here are some things you can do to prevent the situation from getting worse.

  1. Figure out how much you owe. The first step is to get organized. Create a list of your debts, payment due dates, and the statuses of the accounts.
  2. Create a budget you can stick to. Write down your current income and expenses, and come up with a manageable debt repayment plan.
  3. Prioritize which bills to pay off first. If you have multiple credit cards, start with the highest interest rate card. Increase your payments on that card, and continue making payments on the other cards. One by one, you’ll knock out your credit card debt.
  4. Pay more than the minimum amount. As a good rule of thumb, always try to pay your balance on time and in full each month!
  5. Exercise self-control. Getting out of debt isn’t easy, but with some discipline, you can soon reduce your debt and be on your way to financial freedom.
  6. Get professional help. If you’ve done everything you can to manage debt on your own but aren’t making any progress, consider working with a debt relief specialist. Rather than falling into a cycle of debt, a professional can help you get back on track financially.

It’s important to remember that, unlike other aspects of life, you can take control of your financial situation. Even if you are deep in credit card debt, you have the ability to turn things around.
It’s not about denying all of your wants or being ultra-frugal; it’s about making wise money decisions. A $2,000 balance might not seem like that much debt in the grand scheme of things, but with high interest rates, it can make the amount nearly insurmountable.
The next time you wish to make a purchase with your credit card, ask yourself if you have the means to pay it off in full and on time. If the answer is no, figure out what the “real cost” of the item is and determine if it is still worth buying. Sometimes, delaying short-term gratification for long-term financial stability is one of the best decisions we can make for our financial future.



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  • Jacob @ iHeartBudgets June 25, 2012 at 5:18 pm

    That’s why my rule is “never buy anything unless you have cash in the bank to back it up.” I, for one, tell people to absolutely use their credit cards, but never spend money UNLESS YOU ALREADY HAVE IT! And this doesn’t mean “I’ll have it next week”, or “I get paid on Friday.” If you get paid on Friday, THEN WAIT UNTIL FRIDAY TO BUY IT! If you follow this simple rule, you will most likely avoid consumer debt in the first place.

    BUT, credit cards are a slippery slope and can be VERY DANGEROUS in the wrong hands. Thanks for showing the true cost, because sometime people need to be beat over the head with how much money they wasted to wake up and make a change. 🙂

    • Marissa June 25, 2012 at 6:08 pm

      I completely agree. I used to get in trouble all the time with that.

  • Michelle June 25, 2012 at 5:31 pm

    Thankfully I’ve NEVER had credit card debt. I can’t imagine paying so much in interest.

    • Marissa June 25, 2012 at 6:09 pm

      You’re the exception.

  • Jason @ WSL June 25, 2012 at 6:00 pm

    If you’re going to have a credit card it’s so important to have a quick payoff plan and ideally be able to pay the complete balance every month.

    I haven’t charged an item to a credit card in over 2 years and when we did we paid it off fully. I’m considering opening up a credit card in the near future but it definitely won’t be to buy anything that we couldn’t pay for in cash.

    • Marissa June 25, 2012 at 6:09 pm

      They are handy to have around, but its dangerous in the wrong hands.

  • Eric J. Nisall - DollarVersity June 25, 2012 at 6:34 pm

    I like to show people what it really costs them if they do something like that. I’ll be like, that can pay my car bill for almost a whole year, or damn, that’s more than two of my mortgage payments. Sometimes people can’t process the cost in terms of absolutes like dollar amounts, but they can understand it when it’s put in front of them in relative terms.

    • Marissa June 25, 2012 at 7:52 pm

      People are weird sometimes.

  • From Shopping to Saving June 25, 2012 at 6:55 pm

    This is exactly why I stopped shopping with my credit card. Instant gratification is NOT worth all of the extra amounts I paid on all those purses and shoes. What a waste. I’m getting so irritated just thinking about how much I overspent… =(

    Exercise self-control – that really is the HUGEST part of why credit card users get sucked into these traps. We do not have self-control. We need to learn how to say no, and that was the hardest part for me.

    Like the new header!

    • Marissa June 25, 2012 at 7:51 pm

      I think me and you are the same person!

      And thank you… I get bored easily.

  • Sean @ One Smart Dollar June 25, 2012 at 7:10 pm

    I am a big fan of credit cards due to the rewards but you HAVE to be able to pay it off each month or should shouldn’t be charging.

    • Marissa June 25, 2012 at 7:52 pm

      Most people dont have that type of self control.

  • MyMoneyDesign June 26, 2012 at 1:04 am

    Awesome! You know I love math lessons! I think very few people actually understand what’s really happening daily with interest and what a terrible mess it can compound into. Good message!

  • Ethan June 26, 2012 at 4:14 am

    In our business, we are always helping people to put together a debt repayment plan, but they should never get to that situation. I really appreciate that you show a real life example of what the true cost of charging a purchase is. I think every purchase you make with a credit card, the little machine had to display what this will cost you over two years. Maybe then people would think twice.
    Great advice Marissa! Thank you!

  • Early Years June 27, 2012 at 5:20 am

    An employee used her credit card to pay a substantial amount of purchases of over a hundred clients. It can be surmised that the clients paid in cash to said employee. The credit card payments do not tally with the dates the receipts were issued.

  • Jerry Smith November 26, 2012 at 4:15 am

    Handling a credit card is a risky work. A novice person should not handle credit card processing. The are many hidden charges and many procedures involved in a credit card processing. It is very tricky process. Your post has shown the hidden information about the credit card purchases. People who are unaware about these things will surely be benefited by your post.