FLM Step 27: Counting the cost of credit

In honor of Financial Literacy Month, we created a microsite that offers 30 simple steps to financial wellness–one for each day of the month. To enrich the experience, we asked some amazing people to guest post during the month on a topic that is related to the day’s step. Their dedication to financial literacy is truly inspiring! Today, Wise Bread blogger Julie Rains talks about the cost of credit.

When I consider the cost of credit, two categories come to mind: financial and psychological. Financial Costs Most borrowers will consider these elements in making a borrowing decision:

• Monthly payment - can I make the monthly payment?
• Interest rate - does the interest rate seem reasonable?

There are many other factors to bear in mind, such as:

• Total interest paid over the life of the loan (for example, a $200,000, 30-year, 5% fixed-rate loan will cost more than $186,500 in interest; credit card interest rates may run from 7.9% to 29.9% or more, dramatically increasing the cost of a purchase);
• Fees associated with obtaining credit such as mortgage loan closing costs (which may run 2.5% of the total loan value) and convenience check charges (often 3% of the check amount, which added to even a low teaser rate of 2.99% can make a substantial difference in the cost of credit);
• Unexpected fees such as late-payment fees;
• Even moderate amounts of debt can prevent borrowers from saving and investing, foregoing interest earnings on savings account or potential investment growth.

Psychological Costs

• Too much debt can cause stress, especially if income covers monthly payments only and not eventual payoff of a mortgage loan or credit card charges.
• Outstanding loans can be a burden for some borrowers, keeping them tied down to the past (making payments on items purchased, used, and discarded long ago) rather than moving forward with the future (such as saving for a new home or major home improvements, college for their children, or retirement).

There can be benefits to credit as well, such as being able to lock in a price for a new home at a good price with affordable payments, purchasing a car to provide transportation to work, or obtaining a student loan to attend college. It is helpful, though, to consider the entire cost of credit, and not just monthly payments, in making an informed decision to buy now, pay later.

Julie Rains is a Senior Writer for Wise Bread and a freelance writer specializing in career services. She holds a BSBA-Finance, Kenan-Flagler Business School, UNC-Chapel Hill.


Kim McGrigg is the former Manager of Community and Media Relations for MMI.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.