Military Financial Advice - Military Times

Long-term credit cost of a big-screen TV

Credit cards are a wonderful invention. Used properly, they allow people to buy and sell with ease. Bills can be paid by telephone or on the Internet, and the wise use of credit cards establishes good credit scores.

Used improperly, they allow us to live beyond our means, and we may get so entrapped in the life of easy credit that we have no idea what we are really paying for things.

For example, take a credit card with an annual interest rate of 18 percent, a minimum payment of 2 percent per month or $10 --whichever is more -- and late fees of $25 per month. Assume this is a new card used to buy a $2,000 big-screen TV; the required minimum payment is made each month; and no additional purchases are made on the card.

How long do you think it will take to pay off the television? How much will it really cost? The accompanying chart provides the answer.

If you make only the minimum payment, in 10 years you will still owe $1,095.97. But it gets even worse.

In 20 years, you will have paid $4,198.26 in interest, and you will still owe $600.58 on the TV.

The total cost of that TV 20 years later is $6,198.26: the original price of $2,000 plus the interest paid over 20 years. Is it worth it?

Credit card companies exist to make money, and they make a lot. They can legally charge 18 percent or more in annual interest plus substantial late fees. Many cards do not charge an annual fee, and this lost revenue is made up in often-outrageous late fees. Even if you usually pay off your cards each month, if you are late on one payment, the credit card company will usually charge you interest for the next two months, even if the balance is paid in full.

For those of you with overdraft protection on your bank accounts, the picture is more complicated. Once you receive a bill for the balance in your overdraft account, even if you pay off the principal and interest, you will be charged interest on the next month's bill. The balance due changes daily. Interest is computed daily and then added to the existing balance. Unless you call and find out the balance for that day and pay it immediately, you will continue to pile up interest on the interest.

I have seen cases where the balance on the written bill was paid off within the grace period, but additional interest accrued from the billing date so that $10 in interest was accrued on a zero balance.

There is a better way. In a previous column, I discussed creating an emergency fund so that you do not have to run up credit card balances for unexpected expenditures. In setting up your savings plan, why not set aside additional money for large purchases like a big-screen TV? Or use some of your bonus or tax refund.

Get in the habit of asking three questions about large purchases (and perhaps small ones as well): Do I need this item? Can I pay cash for it or pay the credit card bill in full? Is this purchase the best use of my savings -- is it really worth it to me?

Spending on anything other than food, shelter, clothing, transportation, utilities and medical care is a choice. Even in these categories, there is a wide range of choices and prices.

Savings will give you time to make the right choice about your future. Savings can allow you to go back to school to learn new skills and obtain a better job. Savings give you peace of mind and freedom from living paycheck to paycheck.

Look around your home. How much do you have that you seldom or never use and don't really need? If the answer to this question is "a lot," then it is time to examine your spending priorities.

Barbara H. Pietrowski is a licensed certified public accountant, certified financial planner and personal financial specialist. Her practice includes tax preparation, fee-only financial planning and investment management. Her office is in Kensington, Md. E-mail her at barbarapietrowski@yahoo.com.