Is Credit Leading to Society's Downfall

Credit card companies have slick advertisements showing happy people remodeling their homes, and lives, using their zero-percent interest rate credit card. Every product being sold today, regardless of necessity, can be purchased with a credit card. None of these companies will tell you how much that instant gratification will cost you. The truth is it can cost you your financial future.

Imagine for a moment that Betty and Joe decide to purchase a new flat screen television for their home. They find a helpful salesperson at a local electronics store to help them.

Betty's husband falls in love with a Sony 52" flat panel LCD HDTV on sale for a final price of $2,499.99. Betty reminds her husband that they budgeted $1,000 for this purchase. The sales person suggests they apply for the 0% interest 3-year financing and they qualify.

Betty mentions their current television stand won't support a television that big. The salesperson shows them television stands and they purchase a television stand for $389.99. The salesperson suggests purchasing an extra warranty that will replace the unit if necessary; this costs an extra $249.99. Delivery is free and they make the necessary arrangements.

Total purchase: $3,139.97 + $188.39 tax = $3,328.36

The financing contract states the minimum payment is $10.00 per month. After three years, the interest rate becomes 19.8% with a default rate of 23.8%. If Betty and Joe pay a minimum payment of $10 per month for 36 months they will only have paid $360 toward their debt amount. They would need to pay a minimum of $86.86 per month to pay this debt off by month 36.

If Betty and Joe use the $1,000 they have in savings to pay for their purchase over the 36 months (a payment of $27.00 per month), they still will not have paid off the balance by the end of the term. Betty and Joe intend to pay the purchase off long before that. They decide they'll use their tax return the following spring for the balance.

Let's imagine, for a moment that Betty and Joe forget to do so and continue to make the $27.00 payment each month. It's important to realize that once the 0% interest rate period is over, a 19.8% interest rate applies to the entire balance from the date of purchase, not the remaining balance as many people assume.

At the end of 36 months, their balance would be $2,356.36 before interest. At 19.8%, their balance would now be $4,686.12. Their minimum payment becomes 4% of their balance or $181.82. Betty and Joe are busy and forget they've reached the end of the term. They forget to read their statement for one month. As a result, they send in their usual automatic payment of $27.00, causing a default. The interest rate increases to 23.8%.

Betty and Joe realize their error the following month and begin sending in the $181.82 minimum payment. If Betty and Joe never miss another payment, they would pay off their balance in 36 months for a total of $6,626.38 with interest totaling $1,940.26.

Think this couldn't happen to you? Millions of people have believed that and ended up in the same place: bankruptcy. The cycle becomes endless as people struggle to escape high interest rates by transferring balances from one 0% interest rate card to another, incurring outrageous fees in the process.