Re: What's the Big Deal with APRs?
10-04-2012 07:12 AM
I don't use store cards, so can't address anything about them specifically. But one reason some of us want a low-APR card in our arsenal is because things happen unexpectedly. For example, kids. Or hailstorms (roof) or cars break down. Or the opportunity cost of paying cash exceeds that of the total interest payments. There are lots of sound economic reasons to purchase things with borrowed money. Suppose you have a card with a baseline 7% interest rate and you want to replace your old, inefficient woodburning fireplace with a new gas insert. In our case, this would cost about $4000. We could save for a year and pay cash, but continue to pay the cost of wood, higher electric/gas costs to compensate for the heat loss through the chimney and the loss of enjoying a simple to use, efficient, pleasant looking gas fire. Or we could pay for it with a credit card and pay it off over one year. We'd pay $154 in interest, but have the use/enjoyment/efficiency of the insert for an entire year. A rational person might decide that the year's use is worth $154. However, with a 29% interest card, that interest cost for the same 12 months goes to $688. Something very few people would rationally choose. So lower interest cards allow carrying a balance to be a rational choice rather than a desperate measure.