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Why pay more? Alanís story

 
Alan uses his Visa card mainly for emergencies. But a new TV catches his eye, and in a moment of weakness he buys it. The TV cost $3,000. But Alan can only afford to pay $100 each month on his Visa bill.
 
What does it cost to buy the TV this way? Hereís how the math works out:
 
 Yearly interest rate on Visa card
 18%
 Monthly payment
 $100
 Time it takes to pay
 3 years
 Total interest Alan pays
 $1,015.40

With so much interest, Alan pays more than $4,000 for his $3,000 TV.
 
Alanís other options
Tip:
Alan would have paid even more if he had used a department store card with a higher interest rate. Some cards charge 28% interest a year. If Alan had bought the TV on a store card like that, it would take him more than four years to pay off the debt Ė and he would pay more than $2,200 in interest!
 
But if Alan had used a line of credit to pay off his credit card bill, he would pay a lot less. Assuming a fixed interest rate of 7% (though line of credit interest rates often change), Alan would have paid only $307.41 in interest. And he would have paid off the TV a lot faster.
 
This chart compares the costs of Alanís different options:
 
 If he uses this card:
 He pays interest at:
 For this long:
 So the $3,000 TV costs:
 Visa/Mastercard
18% a year
 41 months
 $4,015.40
 Department store
28% a year
 52 months
 5,219.85
 Line of credit
7% a year
 34 months
 3,307.41

Try it yourself!  Use the Cost of Borrowing Calculator to see how the way you borrow can affect your costs.