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How much does my vacation really cost?
Note: You can use any financial calculator to do this problem, but if you want the BEST, you can
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THE SCENARIO
I went on a cruise with my wife. All told, with tips, excursions, and drinks, the cost came in at $2,000.
I put the entire balance on a credit card I never use for anything else, and I pay the (initial) minimum required payment of $40 every month until it's paid off.
The card charges me 13.99% interest on my balance.
The question is: How much do I pay my credit card company for my $2,000 vacation?
THE SOLUTION
This one has two parts.
First, I have to find out how many payments I have to make.
Then I have to multiply that by my $40 monthly payment in order to determine the total amount I pay to my credit card company for my $2,000 vacation.
Step 1
First things first, make sure the calculator is using 12 Payments per Year.
N: (this is what I'm trying to find)
I/YR: 13.99 (My credit card company charges me 13.99% interest)
PV: 2,000 (I charged $2,000 to my card for the vacation)
PMT: -40 (I'm paying $40 per month)
FV: 0 (I'm fully paid off at the end)
If I make that $40/month payment, I'll be paying for
75.44 months.
Step 2
The total amount I'll pay my credit card company is $40 x 75.44, or $3,017.78*.
So not only does it take me more than 6 years to pay for the vacation that I just took, but I'll end up paying an extra $1,017.78 overall.
What do you think? Would it be worth it to you to pay an extra thousand bucks because the credit card company gives you lots of time to pay?
Or do you feel like they're ripping you off? Let us know in the comments!
* Note that there are different ways to figure out what to do in the last month, and that can change the answer slightly. However, in this case, the differences ended up being fifteen cents or less, so it wasn't worth over-complicating the question to go into those details.
