The Cost of Credit

By: Mike Goldstein | Posted: 02nd May 2007

In September, Luciana is approved for her first credit card! She grabs her purse and visits her local appliance stores perusing the aisles for the best deal on a refrigerator. After careful evaluation of the different brands and added features she purchases an Energy Star refrigerator with her new credit card. Once home she excitedly awaits the arrival of her purchase enjoying the benefits of using credit to purchase an item her family desperately needs but lacked the ready cash capital to purchase.

Although Luciana and her husband are both employed they found that with their monthly mortgage, electricity and water bills that they could only make minimum payments on their purchased Energy Star refrigerator. Luciana evaluates the cost of having purchased the refrigerator on credit. The price of the refrigerator was $1,500. The interest rate on her credit card was 24%. She calculates that with minimum monthly payments, the cost of the refrigerator plus interest comes to $2,438.13!

As Luciana found there are strings attached to using credit. It costs something. If you are thinking of opening a credit account your first step should be to figure out how much it will cost you and whether you can afford it. Then you should shop for the best terms. Important terms to understand:

-Interest is the amount the lender charges you to let you use their money. It is a percentage of the principal (charged per year, month, or week.)
-Fees cover the lender's costs to review your credit application or to service your account (maintenance fees, service charges, late fees).

Under the Truth and Lending Agreement, the creditor must tell you in writing before you sign an agreement the exact terms. Check the back of the credit card agreement form to review the interest rate, annual percentage rate (APR), and additional user fees. Creditors must tell you when finance charges begin, the default APR and the grace period to pay your purchase balance in full before you pay a finance charge. Study these terms carefully. Understand that these terms can change 15 days upon written notice from creditors. Take charge of your credit! Contact your creditors to ask for the best terms.

Your Money & You Staff have written a series of finance related articles. For additional information on related topics, visit http://yourmoney.accion.org
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Tags: grace period, aisles, creditor, finance charges, annual percentage rate, refrigerator, late fees, maintenance fees, minimum payments, finance charge, service charges, account maintenance, careful evaluation, credit application, added features, energy star, water bills