Luc wanted to buy his partner a new coat as a holiday gift. He started saving in June, setting aside $50 a month. By early December, he had saved $300 for the gift. He took his cash with him and headed off to the mall.
After looking in 3 or 4 stores, Luc found the perfect coat. Almost. The only thing that was not perfect was the price: $650, including the tax. That was $350 more than Luc had planned to spend! What would happen if he buys the coat?
Luc would have to charge the extra $350 to his credit card. He doesn’t have the money to pay that amount off right away. So he will have to pay it off slowly, $50 a month. That’s the same amount he was saving before the holidays.
How long will it take Luc to pay off his credit card? His credit card charges 19 percent interest yearly. So, if he pays $50 each month, it will take Luc 8 months to pay off his debt. That means Luc’s $350 debt will cost $400 to pay off. That’s 20 per cent more than if he had paid cash.
So what’s the real cost of that $650 coat? It will actually cost Luc $700.
Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca
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