6 ms·

> Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. In scenario 1, you save $100 each month. The bank pays you 0

by ac29 11y ago

> Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. In scenario 1, you save $100 each month. The bank pays you 0.5% interest. As of January 1st next year you'll have a new TV and $2.75. In scenario 2, you put $1200 on a credit card with a 10% APR. You pay $100 each month towards the credit card bill. As of January 1st next year you have a TV you've been watching for a year already and owe $69. You've essentially paid $72 for the privilege of getting the TV you wanted a year earlier. I think this is a good point, but the sort of people who would need a year to save $1200 do not have the sort of credit to get a 10% APR credit card, APR's closer to 20% or higher are more likely. Run the math again at 18% APR ($133 in interest over the 14-month payoff period) or even 24% ($185 in interest over the 14-month payoff period), and you quickly see just how much premium it costs to get that TV a year earlier. I'm ignoring the negligible savings rate interest in your example and, probably foolishly, assuming this hypothetical person only has this single CC debt.

ethbro 11y ago
> Run the math again at 18% APR ($133 in interest over the 14-month payoff period) or even 24% ($185 in interest over the 14-month payoff period), and you quickly see just how much premium it costs to get that TV a year earlier. I feel like the issue isn't just the TV. It's that it's the TV, plus the next thing, plus the next thing. Or in other words, tiers of debt usage from best to worse: (1) completely avoid paying interest charges, (2) pay interest charges on large purchases with full knowledge and planning and in a responsible manner, (3) pay interest charges without knowledge of what you're paying or what to do about it. Personally, I think it's a failure of financial literacy of the US educational system on one of the most important aspects of kid's lives. I have met incredibly educated people that are still ignorant about how credit cards/interest charges work and only internalized "Never use credit cards!" advice. I've also met less educated people who never think past "This is what it says the minimum payment is, so I pay that." Neither position is good. And they. aren't. that. complicated. The disclosure sheet gives you annual fee (if any), APR when interest is charged, and any penalties that may result in an APR adjustment. After that it's simply "If you have a >$0 statement balance from the previous month after your due date and payment, then you begin accruing interest on the daily total of your balance." Not rocket science.
- bufordsharkley 11y ago
  > I have met incredibly educated people that are still ignorant about how credit cards/interest charges work and only internalized "Never use credit cards!" advice. I feel that on a rational level, I understand the credit card companies' game, but more than that, I fear them and their power and intelligence. Sure, I'd like to think I'm smart enough not to be tricked by them, but it's safer to avoid the deal with the devil altogether.
  - ethbro 11y ago
    Fair point. We could probably term that the "unnoticed terms" risk and assign a non-zero value to it. I'd only say two things in defense of credit card use (both valid in the US - not sure about other countries): - Credit card companies are required to compile all of the information I mentioned into a fairly standardized form per the Truth in Lending Act (see: https://www.federalregister.gov/articles/2010/02/22/2010-624/truth-in-lending#h-253 https://www.federalregister.gov/articles/2010/02/22/2010-624... ) - Credit card companies are competing for your business. At least with decent credit scores, it doesn't make sense for them to have unreasonable terms or try to screw you over
  - superuser2 11y ago
    Unless you are at a very small bank/credit union (and sometimes not even then) your bank probably is a credit card company.
  - nommm-nommm 11y ago
    You can play the "game" in a fairly safe manner - Get a no-annual fee credit card. Put it in your sock drawer. Take it out every 6-12 months and buy lunch with it. When you get home put card back in sock drawer and RIGHT AWAY pay off the amount you had for lunch on your bill. (You almost always can make payments on a zero balance. Citi was kinda weird about it but I make payments over my balance all the time and only Citi gave me a "can't pay over 20% of your balance"). Just having the card and not using it "counts" in your score. The lunch is just to keep the bank from marking your card as inactive and cancelling it. If you feel you will be tempted to use it to increase your overall spending - then by all means avoid it.
zippergz 11y ago
> I think this is a good point, but the sort of people who would need a year to save $1200 do not have the sort of credit to get a 10% APR credit card, APR's closer to 20% or higher are more likely. My credit score according to Credit Karma is 811, which I think everyone could agree is very good. I just spot checked two of my credit cards, and they're both at about 16% interest. Now, maybe I could get a lower rate if I asked, but that's what they gave me by default. It doesn't matter to me since I never carry a balance (in fact, I didn't even know what the interest rate was; I had to go look). But 10% does seem pretty optimistic. That said, I agree with the overall point. It should be acceptable to use credit in the situation described, as long as you're completely aware of the actual cost and are making a rational decision. Unfortunately, too few people do the math, and even for very educated and intelligent people, purchasing decisions can be irrational.
- Retric 11y ago
  There are multiple types of credit cards. Generally you can trade higher rates for higher credit limits, a longer float before interest starts, a low intro rate 18mo at 0% is common, cash back, or other rewards. If you really pay off every months you want a 45 day carry before interest and cash back. But, they often have much higher rates. PS: I have two one at 9% another at 12%, but the 12 has a much higher limit.
epimetheus 11y ago
Actually, a lot of places constantly run "Zero Interest If Paid Off In 12 Months" deals all the time. Lowes, Furniture stores, and even some Credit cards. We've paid off Couches, A refrigerator, a new Sewer Drain, and several other things (a nice Kitchen Table most recently) this way. It's not as good as saving for it, and getting a few dollars of interest, but that's a marginal gain anyway.
- elf25 11y ago
  nothing wrong with zero % interest! If you have the means to get it paid off. That's called using other peoples money.
- evunveot 11y ago
  The Amazon Prime Store Card is an example. You can choose per transaction either 5% cash back or 6/12 (sometimes 24) months interest-free financing, depending on the size of the purchase. (You can only use the card at Amazon, though, and there's the Prime membership fee.) I've bought several plumbing fixtures and a laptop without paying any interest this way.
  - padobson 11y ago
    This is effectively how the low fed-funds rate trickles down to the consumer - there are 0% financing opportunities everywhere. Ultimately, these deals are subsidized by people who get charged with massive deferred interest payments because they don't plan properly, and that sucks for them, but as you say, it's a great way to start experiencing the benefits of a purchase instantly. Even better is to use the financing opportunity on something that makes money. I've furnished apartments using 0% financing, and I'll get anywhere from 50%-100% increase on rental income for a furnished apartment - while paying no interest on the loan! It's like putting extra money in your pocket every month for free.
    - forgetsusername 11y ago
      >This is effectively how the low fed-funds rate trickles down to the consumer - there are 0% financing opportunities everywhere. Indeed, and it's important to point this out to those who insist "Average Joe" doesn't benefit. Three of the largest investments people will make in their lives are 1) their home, 2) their education and 3) their vehicle. All 3 are generally financed, and financing rates are at historic lows.
resolaibohp 11y ago
I am not sure I agree that the kind of people who would need a year to save $1200 do not have the sort of credit to get a 10% APR credit card. There are plenty of high income earners who are just as irresponsible with spending as some low income earners. I always had a good credit score during the years it would have taken me a year to save $1200.
true_religion 11y ago
I think the whole analogy is moot since anyone buying a TV would, at least, try for store financing. A quick look up says that Best Buy offers 11.9% APR for select purchases, or 25% for others.

by ac29 11y ago

ethbro 11y ago

> Run the math again at 18% APR ($133 in interest over the 14-month payoff period) or even 24% ($185 in interest over the 14-month payoff period), and you quickly see just how much premium it costs to get that TV a year earlier. I feel like the issue isn't just the TV. It's that it's the TV, plus the next thing, plus the next thing. Or in other words, tiers of debt usage from best to worse: (1) completely avoid paying interest charges, (2) pay interest charges on large purchases with full knowledge and planning and in a responsible manner, (3) pay interest charges without knowledge of what you're paying or what to do about it. Personally, I think it's a failure of financial literacy of the US educational system on one of the most important aspects of kid's lives. I have met incredibly educated people that are still ignorant about how credit cards/interest charges work and only internalized "Never use credit cards!" advice. I've also met less educated people who never think past "This is what it says the minimum payment is, so I pay that." Neither position is good. And they. aren't. that. complicated. The disclosure sheet gives you annual fee (if any), APR when interest is charged, and any penalties that may result in an APR adjustment. After that it's simply "If you have a >$0 statement balance from the previous month after your due date and payment, then you begin accruing interest on the daily total of your balance." Not rocket science.

bufordsharkley 11y ago
> I have met incredibly educated people that are still ignorant about how credit cards/interest charges work and only internalized "Never use credit cards!" advice. I feel that on a rational level, I understand the credit card companies' game, but more than that, I fear them and their power and intelligence. Sure, I'd like to think I'm smart enough not to be tricked by them, but it's safer to avoid the deal with the devil altogether.
- ethbro 11y ago
  Fair point. We could probably term that the "unnoticed terms" risk and assign a non-zero value to it. I'd only say two things in defense of credit card use (both valid in the US - not sure about other countries): - Credit card companies are required to compile all of the information I mentioned into a fairly standardized form per the Truth in Lending Act (see: https://www.federalregister.gov/articles/2010/02/22/2010-624/truth-in-lending#h-253 https://www.federalregister.gov/articles/2010/02/22/2010-624... ) - Credit card companies are competing for your business. At least with decent credit scores, it doesn't make sense for them to have unreasonable terms or try to screw you over
- superuser2 11y ago
  Unless you are at a very small bank/credit union (and sometimes not even then) your bank probably is a credit card company.
- nommm-nommm 11y ago
  You can play the "game" in a fairly safe manner - Get a no-annual fee credit card. Put it in your sock drawer. Take it out every 6-12 months and buy lunch with it. When you get home put card back in sock drawer and RIGHT AWAY pay off the amount you had for lunch on your bill. (You almost always can make payments on a zero balance. Citi was kinda weird about it but I make payments over my balance all the time and only Citi gave me a "can't pay over 20% of your balance"). Just having the card and not using it "counts" in your score. The lunch is just to keep the bank from marking your card as inactive and cancelling it. If you feel you will be tempted to use it to increase your overall spending - then by all means avoid it.

zippergz 11y ago

> I think this is a good point, but the sort of people who would need a year to save $1200 do not have the sort of credit to get a 10% APR credit card, APR's closer to 20% or higher are more likely. My credit score according to Credit Karma is 811, which I think everyone could agree is very good. I just spot checked two of my credit cards, and they're both at about 16% interest. Now, maybe I could get a lower rate if I asked, but that's what they gave me by default. It doesn't matter to me since I never carry a balance (in fact, I didn't even know what the interest rate was; I had to go look). But 10% does seem pretty optimistic. That said, I agree with the overall point. It should be acceptable to use credit in the situation described, as long as you're completely aware of the actual cost and are making a rational decision. Unfortunately, too few people do the math, and even for very educated and intelligent people, purchasing decisions can be irrational.

Retric 11y ago
There are multiple types of credit cards. Generally you can trade higher rates for higher credit limits, a longer float before interest starts, a low intro rate 18mo at 0% is common, cash back, or other rewards. If you really pay off every months you want a 45 day carry before interest and cash back. But, they often have much higher rates. PS: I have two one at 9% another at 12%, but the 12 has a much higher limit.

epimetheus 11y ago

Actually, a lot of places constantly run "Zero Interest If Paid Off In 12 Months" deals all the time. Lowes, Furniture stores, and even some Credit cards. We've paid off Couches, A refrigerator, a new Sewer Drain, and several other things (a nice Kitchen Table most recently) this way. It's not as good as saving for it, and getting a few dollars of interest, but that's a marginal gain anyway.

elf25 11y ago
nothing wrong with zero % interest! If you have the means to get it paid off. That's called using other peoples money.
evunveot 11y ago
The Amazon Prime Store Card is an example. You can choose per transaction either 5% cash back or 6/12 (sometimes 24) months interest-free financing, depending on the size of the purchase. (You can only use the card at Amazon, though, and there's the Prime membership fee.) I've bought several plumbing fixtures and a laptop without paying any interest this way.
- padobson 11y ago
  This is effectively how the low fed-funds rate trickles down to the consumer - there are 0% financing opportunities everywhere. Ultimately, these deals are subsidized by people who get charged with massive deferred interest payments because they don't plan properly, and that sucks for them, but as you say, it's a great way to start experiencing the benefits of a purchase instantly. Even better is to use the financing opportunity on something that makes money. I've furnished apartments using 0% financing, and I'll get anywhere from 50%-100% increase on rental income for a furnished apartment - while paying no interest on the loan! It's like putting extra money in your pocket every month for free.
  - forgetsusername 11y ago
    >This is effectively how the low fed-funds rate trickles down to the consumer - there are 0% financing opportunities everywhere. Indeed, and it's important to point this out to those who insist "Average Joe" doesn't benefit. Three of the largest investments people will make in their lives are 1) their home, 2) their education and 3) their vehicle. All 3 are generally financed, and financing rates are at historic lows.

resolaibohp 11y ago

I am not sure I agree that the kind of people who would need a year to save $1200 do not have the sort of credit to get a 10% APR credit card. There are plenty of high income earners who are just as irresponsible with spending as some low income earners. I always had a good credit score during the years it would have taken me a year to save $1200.

true_religion 11y ago

I think the whole analogy is moot since anyone buying a TV would, at least, try for store financing. A quick look up says that Best Buy offers 11.9% APR for select purchases, or 25% for others.