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!"
|Outfit I just had to have for the party||$90|
|New Shoes to go with the outfit||$65|
|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."
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