The Credit Card trap

Let’s say you buy a new ultra thin television for £2,500 and you use a credit card with annual percentage rate (APR) of 18%. Your minimum monthly payment could be as low as £50; however, to calculate your total costs you will need to know how your minimum payment was calculated.

A minimal payment is typically determined by using a percentage of your entire balance. This is usually 2%. Keep in mind that the minimum payment first goes towards the interest charge and then the balance to the original amount that you borrowed.

The monthly payment would be £38 in interest leaving £13 towards your £2,500 debt. After the first payment, you would still owe £2,487.

If you paid only 2% of your total balance due every month, it would take 334 months to pay off your debt. In other words, it would require 28 years to pay off the £2,500 liability. The interest paid on this would be £5,897 so your true cost of the TV would end up being £8,397.

But, that is not the opportunity cost, what could you have made in your business with £8,397?