Credit cards are marketed as tools of convenience (why carry around all that cash?) and a means of getting something for nothing (we’ve got rewards points!).
Be we all know the truth (especially those of us who know darn well we are not carrying around all that cash): Using credit cards is about instant gratification—I can have what I want right now, even though I don’t actually have the money to pay for it. But do you know how much instant gratification is costing you? If you took the time to calculate the price, you might think twice about paying it.
Let’s say you want to purchase a $300 pair of shoes. Option A: Diligently put aside $60 each month until you have enough cash to make the purchase. Option B: Make the purchase today, right now, using your credit card. How much will instant gratification cost you?
The answer to that question lies in how long it takes you to pay off the credit card balance created when you borrow the money for the shoes. That’s right, when you use a credit card, you are borrowing money, which you must repay with interest. If you have a credit card that charges 15% interest on outstanding balances, and you make payments on that balance equal to the $60 a month you could save to buy the shoes, it will take you at least six months to pay for those shoes, spending a total of $360. Assuming you pay your credit card bill on time and don’t incur any additional penalties or fees, that means you paid an additional $60 for instant gratification.
“But they’re on sale,” you’re thinking. Or you may be worried that the shoes will be sold out in the five months it could take to save the cash to buy them. However, not only is that unlikely, it is far more probable that the shoes will be available in a couple of months at lower price—on deep discount at the store or even available at a nearby outlet mall—than they were when they first came out. By waiting, you could end up paying as little as $150 for those $300 shoes. Add in the price of instant gratification, and you’ve hypothetically saved $210 by taking the time to put aside cash for the shoes. You could use that to pay down debt or boost your savings. Or you could bank half and use the other half to reward yourself for your patience and financial discipline with a second pair of shoes from that outlet mall.
This is a very basic and simplified example, but you don’t need to be a math wiz to figure out the price of financing instant gratification with credit for any purchase. There are lots of great online calculators (try this one at Bankrate.com) that will tell you how much interest you will ultimately pay on a credit card balance, depending on how long you take to pay it. Or better yet, get a credit card debt pay-off app on your smartphone, so you can do the math on the spot, right in the store, before you make a purchase. I have both PicsAlive’s Credit Card Debt Pay Off and John Rouda’s Credit Card Payoff Calculator apps on my iPhone.
Here’s my point: Pursuing wealth for life means doing all you can to avoid paying for instant gratification. Delayed gratification, diligent saving and disciplined spending are the keys to improving your finances and getting you on the path to financial freedom.