The Frightening Reality of a $13 Turtleneck and Compound Interest

By Mary Beth Barber

When I went back to get my MBA at Drexel University-Sacramento, I knew that I’d be learning about business and finance. I didn’t know that I’d be kicking myself about inexpensive clothing I purchased my junior year in college on credit.

The last assignment in my first-quarter finance class was “Time-Value of Money,”or running the math on a handful of different scenarios like mortgages, stock values… and credit cards. We first looked at some extreme samples, and the most egregious examples of massively inflated interest are those short-term paycheck loans that typically last a week to a month.

Do the math, and the annual interest rate calculated is beyond the pale – in the triple digits, if not more. Despite having been a creative-writing major in undergrad, I’m math-smart enough to know that taking interest of $25 from a $250 check for a week-long loan is pretty steep, and rather stupid. I’m more practical than that, right?  Not so much.

  • Example: In December of my junior year I bought a turtleneck. I remember the moment distinctly, because it happened at a time when I couldn’t really afford it. I was on the road with a sketch-comedy troupe, living out of a van with nine other arts-types and hotels. I was preparing to return to my Midwestern university in January, and the living-expense funds I had collected during the summer months were almost gone. I didn’t really need the turtleneck, since once I started in school I’d have a job and parental support. But I was cold, it was on sale, and I could pay it off when things got back to normal in January, right?

I never paid it off. I returned to school and opted to join the newspaper rather than return to a waitressing job, a decision that made me educationally rich but cash-poor. Then I graduated, and got a job as a reporter – cash poor again. After that I ran off to San Francisco and New York and worked in fun but financially sporadic jobs (stage acting, dot-com startups, freelance writing, film production). I was financially frugal – I had a rent stabilized apartment, always paid my minimums, and never spent some outrageous amount on strappy sandals, designer dresses or lavish meals. Sometimes I took saving money to such an extreme that when things were really lean I was fed by my fellow impoverished friends who were at that moment more cash-flush from a recent gig.

My mostly sound financial actions have paid off. I’ve never had a credit-card company call my house or had a bill in collections. But regardless of my frugality, those charges that started with the turtleneck lingered on my card when there were more important things to pay: health insurance premiums, theater production expenses, or helping those same friends who fed me when I had pennies in my pocket. These things were important, and how much could that $13 turtleneck really cost me, anyway?  $686.76, actually.

When I ran the math of how much keeping a $13 charge on my credit card for the time between college and now (approximately 20 years) at 20% interest (which isn’t unheard of for a college-issued credit card), the total on my calculator spit out a number higher than 52 times what I had originally paid for the turtleneck. I know the math is right – I did these problems over and over again in my Drexel class and got pretty good at it. But that much? Almost $700? Yes, because the real culprit is monthly compound interest on that 20% annual interest since I first purchased the turtleneck.

My college charges are buried under other debt (like what I spent for health-insurance premiums) that is at much more reasonable rates. The offers I took made sense at the time, but the credit-card companies have been having me pay the low-rate debt first. Once that’s cleared, then I can start to get to the stuff at 20%.

Good news– the new law changes this and the high-rate debt is cleared first, as long as you pay more than the minimum. Bad news — the chances of getting those killer low rates any more is pretty much out the window. College students and other high-risk folks will have horrible rates, and some people won’t be able to get a card at all.

I share this realization to encourage others not to let debt linger on credit cards. It’s easy to keep that balance rolling month to month to month, and your credit score will be stellar.

In fact, responsible folks who pay the minimum or more but never pay the card off are exactly how the credit-card companies make money, because that interest adds up over time. But what adds up for them comes out of your pocketbook. Do the math, and get that debt cleared up sooner rather than later. Or better yet, don’t buy that turtleneck, even if it is on sale.

COMPOUND INTEREST: taking interest earned and adding it to the base, so that after each time period the base amount to determine interest grows. Most credit cards compound monthly, so a so-called “annual percentage rate” of 20% is actually closer in real terms to 22%.

Use this calculator to see how much a base amount will grow to after a particular time period. Remember that most credit cards compound monthly, so while the annual rate may be 20%, you need to put “12” and not “1” into the “compound interest X times annually” spot.

CHANGES IN LAW FOR CREDIT CARD PAYMENTS: See this analysis of the most recent changes for credit cards and consumers from the Wikipedia entry of the laws Congress passed last year.

EDITOR’s NOTE:  For those who are lucky enough to cut up their cards forever, here’s a clever and cute way to recycle the cards!  Enjoy!

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  1. Ashley says

    great article Mary Beth! very informative! (and horribly frightening …)

  2. Jamie says

    Thank you SO much for writing about this! I know some people who could tell you the names of both of Britney Spears’ children; the past three men Jessica Simpson has dated; and what movies Brad Pitt starred in last year; but don’t know what the APR on their credit card is, what balance they’re carrying, and how much interest they’re paying each month.

    Anyway, thanks for drawing attention to this issue! Hopefully it’ll encourage people to be more responsible and proactive about their finances, before it’s too late (hello, debt collector…)

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