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Financial Literacy

Cash vs. Credit

"It's party time and my parents said no way, no how to the extra money I need. What do I do now? They just sent me $250 for books. I know... I can hold on to the cash for emergencies, charge everything on my Visa and pay it back each month. It'll take me no time at all. Besides... I'm a responsible person!"

My Expenses this Month
ExpensePrice
Food $60
Outfit I just had to have for the party $90
New Shoes to go with the outfit $65
Books $250
Gas $20
Total for the month $485

Let's take a look at what this would cost you if you did charge it to your credit card.

According to Bankrate.com a credit card balance of $458 at 18% with minimum payment calculated at 2.5% = $12.13 per month.

It's only $12.13, right? Wrong!

It will take you 81 months to be rid of your debt if you paid the minimum monthly payment. In that time, you will pay $352.98 in interest.

If you devoted $12.13 to your debt every month even when your minimum monthly payment begins to decrease, it would be paid off in 62 months and would cost you $261.04 in interest.

Either way -- is it worth it?

"Looking at it that way, maybe I can do without the new outfit after all and use my credit card in case of emergencies only. Having a student loan is one thing but spending over $800 to pay back $485 just isn't worth it."


Credit Card Calculator
Try it for yourself.

 Read about how this applicant was denied his security clearance due to financial reasons.

Now that I'm convinced -- what can I do?

Things you can do to avoid getting into debt:

  • Keep a budget (earnings vs. expenses)
  • Take a financial literacy/money management course
  • Know your limits
  • Consider debit instead of credit
  • Pay credit card balance monthly or pay more than the minimum balance (this will help you establish good credit).
  • Avoid impulse buying
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