People often don’t take into consideration interest charges when figuring in the cost of something they purchase with a credit card. Of course, if it’s paid off by the due date, there may be no interest charges and they only end up paying the actual price of the item.
However, if not paid off right away, interest will be added on top of that purchase.
For example, let’s imagine you purchase something for $100 on a credit card with a 12% APR. If you don’t pay that off by the due date, it will cost you $101. The next month, if not paid off, you will owe $102.01. And so on.
Of course, that may not seem like much, but most people don’t stop at just one $100 purchase, do they? And, even if they figure it will cost them a couple bucks in interest, they don’t think of all the other items they’ve purchased that will also cost them a couple bucks in interest.
Imagine that’s $1000 (either 10 $100 purchases or one $1,000 purchase). Now, instead of $2.01 after a couple months, it is $20.10. And it keeps going up and up.
Think Paying Cash Will Help?
Some people do realize this, and so they stop putting new purchases on their credit card. They will only purchase new things if they have the cash to pay for them.
Of course, this is good, as it helps you build the habit of not making purchases you cannot really afford. It’s too easy to just say “charge it!” But, by forcing yourself (or being forced) to pay cash, you learn to manage your money better. You learn to prioritize. You don’t buy stuff unless you really need it or can afford it.
For the most part.
This habit will also help you to keep your credit card debt from increasing and getting worse, so long as you are still making payments and not using the money that should be used for your credit card payment to buy more stuff.
Debt Costs You Money!
As long as you are in debt, it is still costing you.
Let’s say you have no credit card debt and you buy something for $100. How much does that cost you? Well, it costs you $100.
But, let’s say you have credit card debt and you buy something for $100. How much does that cost you? Well, that’s going to vary depending on your amount of debt, but it will cost you more than $100.
How so?
If you spend $100 to buy something, that’s $100 you did not use to pay down your credit card debt. So, while you didn’t add a new charge to your credit card (which is good), you didn’t lower your credit card debt at all, so, effectively, that $100 spent is still going to cost you another $1 the first month (assuming a 12% APR), then another $1.01 on top of that the following month, and so on.
That doesn’t mean you should go ahead and put it on your credit card, though. It just means you shouldn’t spend money on things you don’t absolutely have to. While you are under the burden of credit card debt, you should buy only the things you need, and not the things you want.
The Bottom Line
Debt makes everything more expensive for you. Even if you pay cash for new purchases, that’s cash that’s not paying down your debt, so your debt continues to grow due to interest charges. That’s why it is important to reduce your spending as much as possible, focus on buying only the things you need, and using your extra “spending cash” to pay down your debt.
Once you have your debt paid off, then you can begin to buy things you want—just don’t charge them!