Don't get trapped by dumb debt

TOM HARTMANN
Last updated 05:00 23/02/2014
Washing machine
Reuters
NOT WORTH IT: When buying major appliances, it's worth working out the cost of fees and insurance before using hire purchase or other credit.

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Ever found yourself caught in a dumb debt trap?

One trap is when you end up paying more for something than you intended because of the high-interest payments and fees that come with borrowing.

It's easy to do - I know, I've been there. One friend's recent experience has been a timely reminder that while you can always dig yourself out afterwards, it's best to avoid these traps altogether beforehand.

My friend needed a new washing machine. Since she didn't want to dip into her savings, she decided she'd put it on her credit card. The machine was $800 and she planned to pay off $50 each month. One crucial thing she hadn't considered was how much the machine would cost her in interest.

Sticking to her plan, the washing machine would have ended up costing her $922 and take 19 months to pay off.

Luckily, before she went ahead my friend used Sorted's debt calculator to work out what she'd save in interest by paying cash instead. When she had all the information, it made more sense to her to dip into her savings and save $122. It's a lesson she won't forget anytime soon.

Going into debt may sometimes seem like a good option - or the only option. But as my friend learned, when interest payments are involved, it pays to know exactly what you're getting into.

So if you're thinking about borrowing to buy, go into it with your eyes open - and stay on the lookout for those dumb debt traps.

Tom Hartmann is resident blogger at Sorted.org.nz.

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