Thursday, December 10, 2015

Interest vs. Penalty

As the holiday season swirls around me, I watch many people using their credit cards to buy Christmas gifts. Many of them can afford these gifts and many can’t but they insist on buying gifts for all of their family members. I’ve heard some of them say how they have maxed out their credit cards! Even though people want to buy everything for their family, there isn’t the need to go into debt for this. This doesn’t mean that they love the person more or less. It just means they have more stuff! I heard one lady say that she pays a lot in interest!

I see people rushing to buy things on sale and since they can’t afford it, they put it all on their credit cards. When the bill comes, they pay the minimum amount each month and it may take months or years to pay off their bill. The interest they pay on the amount they owe is outrageous and they are not really saving money by buying things on sale. In fact, they may be paying a lot more than if they would have waited and bought it at regular price when they could afford it.

This made me think about how we teach our students about credit cards and economics. I don’t know why they call it paying “interest!” Interest to me is associated with savings and checking accounts or other accounts where I earn money. Interest has a positive connotation that means I get more money into my account.

When I use my credit card and I don’t pay it off each month, I am charged interest. Instead this should be called a penalty. I lose money this way. When I show my students that by using a charge card, I am actually borrowing money and when I borrow, I may have to pay the initial amount back plus more if I don’t pay it all back by a certain time. If I buy something for $20 on credit, I may end up paying $22 back for it if I use my credit card. This means I’m losing money! To me, this is not interest but a penalty.

Maybe if we stop labeling the loss on credit cards as interest and call it what it is – a penalty, maybe people will not be so readily willing to use credit cards for more than they can afford.

Maybe our economy wouldn’t be in the fix it is in if people would only buy what they could afford.

Well, maybe our country wouldn’t be in the fix it is in if the country didn’t spend more than it could afford. 

Do you use a credit card? Do you max it out or pay it off each month? Please share.

1 comment:

Clix said...

We have several credit cards. Two of them we do not use, but we keep the accounts open because we've had them the longest and that improves our credit score. Then there's the one we use most of the time, which has a 0% interest promotional rate and offers 'reward points' that we can then use to help pay off the balance once we have enough. The other is a 'backup' card in case we have something unexpected happen (like when our main card had an unauthorized card and we had to cancel it and have a new one sent).

The 0% interest rate will end this coming summer, and before it does I'll either call and ask to have the rate extended or see about closing that account and opening a different one with a promotional rate. By doing this, not only do we avoid paying interest, we are able to use the 'reward points' as a sort of discount on the purchases we make.