How Much Credit Card Debt Is Really Costing You

When it comes time to assess your financial health nothing is more important than seeing an itemized monthly budget in black and white - every single item you spend money on - and what % of your income it represents. Seeing it all on one page makes it real, undeniable, and inescapable. You have to deal with it, and that's a good thing. You can't make intelligent decisions until you have the cold hard facts in hand and one of the most important budget items to examine is debt.

Debt is a serious threat to your financial security because it keeps you from making the most of your money. What you spend on debt payments could instead be saved for an emergency fund,  retirement, or a college education. While the amount of debt that you have can directly affect your financial health, all debt is not created equal. There are many reasons to have debt, some wise, some unwise, and it can affect your financial security in various ways. A mortgage, for example, is often considered to be "acceptable" debt (payments should be no more than 28% of your income) since it involves a fixed cost and a low interest rate. The cost of carrying this type of debt may be partially offset (hopefully) by income tax deductions on the interest paid and appreciation in the value of the house. Also, at the end of the mortgage you still have a valuable asset.

An example of "unacceptable" debt is credit card debt. This is a common item in many budgets but it's important to know the true cost. According to the Federal Reserve, 55% of households carry an average monthly credit card balance of $5,100. This may seem like a huge amount to some, and an insignificant amount to others, but the cost to everyone is the same. Carrying a credit card balance from month to month, however prevalent in our society, is never advantageous. Not only do interest charges continually increase the cost of what has already been purchased, but the required monthly payments restrict your ability to use that money more productively.

Let's say you have a $5,000 balance, at 18% interest. Even if you pay $180/month - far more than the required minimum payment - it will take 3 years to pay off the balance and add $1,500 in interest charges to the cost of what you purchased. Will you even still own those items 3 years from now? Even if they were a "good deal" when you bought them, they're not anymore because you just added 23% (18% over 36 months) to the original cost. If you had invested only the interest portion of those payments for the same amount of time (with a 7% return) you would have over $1,700. After 36 months, would you rather lose $1,500 with nothing to show for it, or have $1,700 in hand? That's a $3,200 difference that shouldn't be easily dismissed.

Even worse is if you pay off the original items in a short amount of time but continue charging new items that take their place. You may feel that paying off individual purchases in a short amount of time is a good thing, but this revolving cycle of constant debt is the same as never paying off the original items at all. Carrying an average credit card balance of $5,000 from age 30 to age 60 (not uncommon these days) could easily cost you $25,000 in interest alone, and $75,000 in lost investment dollars. You just lost $100,000. Was it worth it? Remember, this only involves the interest paid. You could have still purchased everything that you wanted, not depriving yourself of anything, and also saved $100,000! That's not a small amount of money to anyone.

Ask yourself - why is it okay to buy something with money that you don't have yet? If it's not an emergency (fashion emergencies don't count!) just don't do it. Self restraint is highly underappreciated but it pays big dividends when practiced. Pay off all credit card debt as soon as possible, relieve that stress, and give yourself the best opportunity to control your destiny and achieve financial security. A goal to strive for - a mortgage should be your only debt by the end of your 40's.

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