Would You Take Out a 30-Year Mortgage Loan to Buy a Pizza?
While it sounds ridiculous, you may actually be taking out a mortgage when you use your credit card to make purchases on things like pizza or coffee or gasoline. Here’s why:
If you use a credit card that carries a $2,000 credit balance with an 18% annual rate, with a minimum payment of 2% of the balance, or $10 (whichever is greater), it will take you 370 months or just over 30 years to pay off.
So what is the real cost of that pizza?
During that 30 years of making the minimum payment, you would end up paying more than $4,931 in interest and charges, 146% more than the original balance on the card, according to an online calculator on credit-card comparison site CreditCards.com.
According to an article at MarketWatch.com, most people are unable to make these calculations themselves. When given a similar calculation on how long it would take to pay off a credit card with just minimum payments, only 2% of people were able to answer correctly. Only 4% were able to give the correct amount of interest they would pay. And even worse, over 30% of respondents thought they would actually be able to avoid paying interest by making the minimum monthly payment.
So don’t take out a mortgage to buy a pizza. Even better, stop using your credit card altogether until you can pay off the entire balance. Now, I am not against credit cards. I am against financial traps that folks get themselves into when they start down the minimum payment path. A great way to break out of that trap is to save $1,000 for emergencies so the credit card is not a temptation when you are out of cash.