1. Benefits and Costs
b. Explain the Difference in Cost between Cash and Credit Purchases
When you purchase an item with cash, your only cost is the purchase price plus any taxes. When you purchase an item with credit, you add credit costs. These may include interest, late fees
, and annual fees
Interest is the price paid for the use of someone else’s money—for example, the bank
’s money. Interest can also be money paid to savers and investors
by financial institutions, governments, or corporations for their use of your money. So interest can work against you – making things you buy cost more. But interest can also work for you; for example, when you put your money in a savings account, you are lending your money to a bank
and the bank
pays you interest for allowing them to hold and use your money.
Interest rates for loans
can vary quite a bit. You may find a home loan for 5% and the interest rate can be as high as 35% on some loans
or credit cards - it pays to shop around! The interest rate is expressed as an annual percentage rate or APR
. The APR
should be compared among several businesses before using borrowed money, such as credit cards, if you want to save money.
When using credit there are also fees
to consider. Creditors may charge application fees
for some types of loans
, such as mortgages, and annual fees
such as credit cards. Most companies charge fees
for late payments. The total dollar amount paid to use credit, including interest and fees
, is called a finance charge
. Depending on the type of loan, the APR
may include some fees
, but does not include all possible fees
. Sometimes interest rates may seem low but other fees
, such as an annual fee charged to you by the credit card
company, makes the real cost of the credit much higher than it appears.
Knowing the difference between cash and credit purchases can help you make good decisions and save a lot of money in interest charges in the long run.
Credit Card Tips Video
Used wisely, credit cards can offer convenience and flexibility, but if you're not careful credit card use can throw your financial goals off track quickly! Managing your credit card use can help prevent soaring account balances and extra interest payments. Check out this Great Video from our partner, The Federal Reserve Bank of Kansas City.