I recently read a book about everyday finances called Stop Getting Ripped Off: Why Consumers Get Screwed, and How You Can Always Get a Fair Deal by Bob Sullivan that has me thinking. The premise of the book is that many of us don’t know much about simple arithmetic and we get ripped off by people who take advantage of that. I’m calling this series “The Money Chronicles” in the hopes that this will (like the Justice Chronicles) will become a recurring theme.
Virtually everyone I know borrows money in some form, be it a mortgage, a car loan, or a credit card. Very few people are going to let you use their money for free, and it makes sense to charge interest. If you borrow $100.00 at 10% interest and pay it back in a year, you’ll pay $110. Easy, right?
Well… It is, but like most debt it isn’t that clear cut. Because we’ve gotten used to phrases like “annual percentage rate” (APR), “revolving credit,” and “compounding interest,” we tend to sign up for a loan, pay the bill each month, and let somebody else do the math. In a world where everyone is virtuous that would be fine. I’m blogging about this because we don’t live in such a world and there are armies of people out there who are happy to advantage of us, and take our money.
I’m going to start with the place that most people first run into trouble: credit cards. I can’t tell you how many offers I get over the course of a year that promise me all sorts of stuff if I sign up for their card. They do everything they can to tell you that by signing this line you can enter a world of free money. Let’s see what happens with this card.
I’m going to use my current American Express bill as an example. My current balance is $1319.19, the interest rate (annual percentage rate or APR) is 15.24% and the minimum amount due is $28.00. If I pay off the entire balance (as I intend to), I pay no interest. As long as I do this, I’ll never pay a penny of interest.
But if I pay only the $28.00 and continue to pay only the minimum, and never use the card for new purchases it will take 12 years to pay it off and I’ll have ended up paying $2677.00. Better than that, if I make the payment even one day late I’ll be charged an additional $39.00 late fee.
If I spend the next 12 years paying off the card, I’ll be 61 years old when I’m done. In fairness I’ll have gotten the benefit of whatever I bought for the $1319.19, but the rest? The rest of the money ($1357.81) does nothing but make the credit card companies wealthier. And frankly, the 15.24% isn’t too bad. If my interest rate were 20%, I would need 23 years to pay it off and the total payoff amount would be $3722.00. In 23 years I’ll be 72 and will probably have no memory of what I bought in 2010.
There’s lots more, but there’s one thing I encourage you to do: buy Bob Sullivan’s book. One eye opener for me was how the credit cards use average daily balance and how you can save money by making large purchases toward the end of the month. If you do nothing else, read pages 84 to 89.