What does it take to pay off $1,000?

Looks can be deceiving. Take the balance on your monthly credit card statement for instance. It may not tell the whole story.

Americans are so used to living with credit –– and living on credit –– that we often don’t realize the true cost of borrowing and paying back. And those costs can be astounding.

A nation of borrowers
When it comes to credit, we’re charged up and maxed out. More than three-fourths of U.S. households carry the burden of owing: an average of $5,000 in credit card debt and $18,000 on installment loans.

A dangerous numbers game
Credit is easy to use and abuse – not to mention expensive if not handled properly.

Say you owe $1,000 on a credit card with an 18% interest rate – a relatively modest amount to be sure. But consider these two scenarios for paying it off, keeping in mind that on average we owe five times as much.

Best case
You pay the full amount by the beginning of the next billing cycle and you’re off the financial hook –– and free to charge more stuff.

Worst case
You make only the minimum payment each month –– often 2% of the outstanding balance or $10.  Initially that's $20 on the $1,000, but the amount drops each month as the balance goes down. Through the magic of compounding interest, it will take (hold on to your keyboard) more than 18 years and cost $1789.02 to pay off your $1,000 debt."

Almost two grand over 18 years to pay off $1,000! See the danger?

The pitfall of payday loans
Payday loans, cash-advance loans, check-advance loans, whatever the name, these short-term, high-rate loans have become popular with those in need of cash.

After all, what could be simpler than writing a post-dated check to a lender in exchange for cash to tide you over until payday?

Let’s say you write a personal check for $115 to borrow $100 that will be cashed in 14 days. The additional $15 is the lender’s fee or finance charge. Doesn’t sound too bad, right?

But two weeks later, you still don’t have the money to cover the check and the lender gladly allows you to extend the loan –– incurring new fees and increasing the amount of the loan.

While the cost of the initial loan is $15, it actually reflects a whopping 391% ––annual percentage rate. Roll over or “flip” the loan three times and finance charges would climb to $60 –– to borrow $100!

Other options
If you need cash fast for an unexpected expense and you don’t have the savings to fall back on, here are some options that may be available:

• A small personal loan from your bank or credit union
• An advance from your employer or a loan from friends or family
• A credit card offer with a lower annual percentage rate (APR) on cash advances

The bottom line
If your credit card debt is spiraling, you could be mortgaging your future while helping credit card companies grow fatter. Whether retirement is just around the corner or a couple of decades away, ask yourself if that’s what you really want to do with your money.

Next steps
One last word to the wise – don’t wait until you’re debt free to talk with your investment professional about all the things you can do now to prepare for the retirement you want.

NFW-1162AO.2