In the previous installment of this series, I spoke at length about my history with credit card debt. I survived the ride without missing a single payment, without asking the credit card companies to write-off, adjust, or forgive a penny of it, and with both of my kidneys intact ! I have outstanding credit now, and I could walk into the plastic surgeon’s office with my Discover Card tomorrow and schedule surgery. I won’t, though.
If math isn’t your favorite subject, you’re not alone. The above table is a numerical nightmare, but what it shows is the cost to finance my surgery over 3 years. Assuming a bank would lend me money, unsecured, at 6.25%, the finance charges would be around $1,500, and I would be required to make payments of $458.03 each month for 3 years.
When I think about how important this surgery is to me, I have to balance it with my willingness to sign a contract, promising to pay $458.03 each and every month until April 2016. I say “Belt Lipectomy is important,” but when I think about making payments to remove skin that are higher than payments for my car, it gives me pause.
By taking out a loan to have the surgery now, also I’m increasing my eventual cost by about 10%. Instead of paying $15,000, I’d end up paying a total of $16,489.08. That doesn’t sound like a very good deal at all, because it isn’t. Instead, what if I made the same $458.03 payment to myself each month. I could have the $15,000 banked 3 months sooner, and I wouldn’t be out the additional money. In fact, I could invest the money in an interest-bearing account and earn a little extra in the process.
Essentially, the questions I had to answer for myself were,
- “Is it worth paying 10% more to have the surgery now?”
- “Is $458.03 an amount you’re willing and able to pay every month for the next 3 years?
- “What’s the harm in waiting?”
After looking at it analytically, it’s absolutely not worth 10% more to have the surgery now. If I’m going to be paying $400 or more per month for the next 3 years one way or the other, I’d rather keep that extra 10% in the bank. $1,500 isn’t a trivial amount of money to me. It’s not an amount I’m willing to part with for convenience.
This isn’t to say that I would never consider paying a medical expense on credit. If I learned tomorrow that I needed life-saving surgery, I’d swipe that Discover Card in a heartbeat. If a true emergency comes up, having available credit gives me the peace of mind I need to know that I can take care of myself and others if I need to.
Now, this may seem very contradictory, but I wrote about the out-of-pocket expense of having my gallbladder removed. Do you know how I paid for that? Discover Card. Do you know what the balance on my Discover Card now is? A credit balance of $2.83.
Discover Card’s Cash Back Bonus pays me 1%-3%, and occasionally up to 5% back on each dollar I spend using the card. As long as I pay that expense off within 25 days of putting it on my card, I owe Discover nothing more in return. Whenever I have major expenses, especially the ones that I have the money on hand to cover, I put them on the Discover Card so I get the savings. I then immediately send an electronic payment from my checking or savings account to Discover to pay the card off.
The take-away here is simple:
- There are appropriate times to incur debt
- There are inappropriate times to incur debt
- I feel I am much better at distinguishing between them now
- Debt can be a healthy part of your life if managed responsibly