The True Cost of Buying on Credit

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There's a reason so many consumers are struggling today with sky high credit card bills. U.S. consumers are addicted to plastic, and we use credit cards to buy everything from flat screen TVs and tablet computers to fast food cheeseburger meals.

The problem is that buying on credit can cause you serious financial pain. Simply put, paying for items with your credit card is one of the costliest ways to make purchases.

Cash is best

The best way to buy something is to save up the cash you need and then make your purchase. This way, you won't be charged any extra fees or high interest rates. You'll pay exactly what an item costs.

Of course, this isn't always possible. Sometimes, you won't have cash available. In such cases, the next best option is to purchase an item with a credit card, then pay off that card's balance once the bill is due.

If you do this, you won't be charged interest on your purchase. It's when you don't pay off your credit card balance in full, causing the interest to pile up, that you'll learn just how costly credit can be.

The impact of interest

Say you buy an $800 laptop computer with a credit card that comes with an interest rate of 18 percent. If you pay only the minimum payment on that debt each month - in this case, $16 - it will take you 106 months to pay off that debt.

What's even more shocking is the amount of interest you'll pay during this time: more than $796.

That means you'll end up paying nearly $1,600 for your $800 laptop computer.

That's on a relatively small purchase. If you let your credit card debt rise too high, you could end up paying huge amounts of interest if you don't pay off the balance each month.

Other fees

Interest is only one of the many fees that credit card companies charge.

Some credit cards, for instance, charge annual fees that you'll have to pay whether you use the card or not. There are plenty of credit cards available today that don't come with annual fees. While shopping for a credit card, be sure to note if it charges an annual fee.

If you make your payment late, you might suffer a late fee of $15 to $35. However, that's not the biggest hurt that comes with late payments. Most credit card companies will boost your interest rate if you pay late. This means your rate can instantly skyrocket from a reasonable 14 percent to a painful 29 percent.

What if you accidentally go over your credit card's spending limit? Again, you'll face a fee. This fee is an over-the-limit fee and can charge you an additional $15 to $35.

Cash advances on your credit card also charges fees. These fees vary according to the financial institutions behind credit cards, but they are almost always too high.

The lesson here? If you use credit cards, be careful. The best option is to pay off your balance every month. If you can't do this, you might be surprised at how quickly that credit card debt grows.