Think twice before putting that ‘opportunity cost’ on your credit card
Q. We go to Great Adventure every year and we get season passes. It’s always cheaper to buy them for the next season when they first go on sale. If I don’t have the cash, is it worth putting on a credit card?
— Planning ahead
A. It all depends on how much of a discount you’ll receive compared to the interest and possible fees you will pay by making the purchase on the credit card.
With some hypothetical numbers, Roy Williams of president and founder of Prestige Wealth Management in Flemington and Millburn, offered an example.
Let’s say the pass normally costs $100, but you can purchase it in advance for $75, which is a $25 savings. Let’s also assume that you will purchase a total of four passes, so you’d pay $300 for $400 worth of passes. This means that your total savings is $100.
“If you have the cash to pay for them, great. You have locked in the savings,” Williams said. “There is an `opportunity cost’ — you don’t have that money to use towards other items or investing the funds because it is tied up in tickets — to purchasing the passes ahead of time, but most likely, the savings outweigh any possible return you might get on your money.”
Of course, Williams said, once you purchase the passes you can’t change your mind and decide that you don’t really want to go to Great Adventure, or if for some reason you are unable to use the passes, you are out of pocket the total amount you paid. This is the risk you take by buying the passes early, even at a discount, he said.
But let’s assume that you always go to Great Adventure and the likelihood that you won’t go next year is very small.
You then decide to charge the purchase of the four discounted passes for $300 on your credit card that charges you 15 percent annual interest (the national average), and you pay $25 a month towards the purchase — a typical minimum payment, he said. How long will it take to pay this off and how much interest will you be charged?
“If you pay $25 a month towards the purchase it will take you about 13 months to pay off the charge, and you will have paid a total of around $27 in interest,” he said. “This seems like a good plan because you will save $100 if you purchase the passes ahead of time at a discount, and you will only play $27 in interest over the 13 months that you take to pay off the charge. Your net savings is $73.”
Unfortunately, not everyone is disciplined enough to set aside the planned payment each month, Williams said. If you know that you will pay the $25 each month towards the purchase and make each payment on time, then it makes sense to charge the purchase. If, on the other hand, you are likely to add to your credit card balance and make only the minimum payment each month, you could end up paying a great deal more for the season passes, Williamsn said.
For example, if in addition to the season passes you charge some end of the year purchases and as of Jan. 1 of next year, your credit card balance is now $1,000. You have the best intention to pay it off as soon as possible, but things happen and all you can do is make the minimum payment of $25 a month.
“Even if you do not charge one additional item after Jan. 1, it will take you almost five years to pay off the balance if all you pay is $25 a month,” Williams said. “Moreover, you will end up paying about $400 in interest. This also assumes that all of your payments are made on time and you do not incur any other fees or charges.”
The bottom line is that credit cards are great tools when used properly but if not used properly, the interest charges can add up over time and what seems like a bargain now can cost much, much, more than you realize, he said.
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Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.