The true cost of credit cards
What do you do when you want to buy something expensive, like a computer, a new cell phone, or a pair of designer jeans? As a high school or middle school student, you either depend on a parent for the money, or you save the money you earn for long enough to buy the item with cash.
Now fast forward a few years. Picture yourself in college, living on your own, and going to class. You have a lot of responsibilities — homework, paying bills, and possibly a part-time job — but you also have a lot of freedom. How should you balance your social life with your education? Will you cook at home, or eat most meals at restaurants? What clothes will you buy? Where will you choose to live?
As you might imagine, these decisions will have an impact on not only your education, but also your finances. Many college students spend beyond their means, and get themselves into trouble by using credit cards to buy everything from TVs and spring break vacations to everyday necessities like groceries. Before they know it, students are in over their heads. In 2009, the average college senior had more than $3,100 in credit card debt . Add that to an average student loan bill of nearly $20,000, and these students are handicapped right out the gate with a burdensome level of debt.
Calculate the cost up front
What can you do to avoid this situation? First, be aware of what buying on credit really costs you. Interest charges add up quickly. If you don't pay off credit card purchases soon after making them, you'll end up paying more (possibly a lot more) than the original price.
To help you get an idea of what your credit card purchases will really cost, AIE provides a True Cost Credit Card Calculator. The calculator allows you to enter the price of the item and your card's interest rate. It then shows you how much interest you'll pay and how long it will take to pay off the item if you only make the minimum payments. You can recalculate the bill with higher payment amounts to see how the interest and payment period change.
Check out the calculator (www.aie.org/managing-your-money/credit-cards/Calculating-the-True-Cost-of-Credit.cfm) and get a sense of what your future buying habits may cost you. It's a sound investment of your time.