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Why pay more? Alan’s 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? Here’s 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.
Alan’s 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 – 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 Alan’s 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.