I was listening to a couple of podcasts this morning and the overarching theme seemed to be credit card debt. I paid off my $10,000 credit card balance after carrying it for years, but I had a thought this morning that had never occurred to me before. The cost of carrying a credit card balance doesn’t end with the interest… follow along and hear me out.
Let’s say you rack up $10,000 in debt on a high-interest credit card with an APR of 29.9% (a fairly common rate you’ll see in credit card offers you get in the mail). You carry that balance for just over a year. Carrying the balance over this period means now that you owe the credit card company $12,990. That’s the original amount ($10,000) with a year’s worth of interest ($10,000 * 0.299 = $2990). This is the minimum amount that you will have to pay, assuming you don’t allow the interest to compound.
Now think about this: How much money do you have to earn to pay off this $12,990? $12,990 right? Think again. If you are a law-abiding citizen you need to pay your taxes. Just for easy math, let’s assume that 20% of your earned income goes to the good ole’ US government. So you actually need to earn $15,588 ($12,990 + $12,999*0.20). That is effectively a 55.88% interest rate. Hell, that’s not even interest, that’s like vig from a mafia loan shark
If that’s not outrageous enough, let’s think about how much you’ll have to work to earn that $15,588. If you earn $25/hour or $50,000/year (before taxes), You’ll have to work roughly 624 hours to earn that $15,588. To wrap your head around how many hours it lets break it down even further. That’s about 15.5 weeks or nearly 4 months. Compared to only 3 months of work had you just worked to earn $12,000 ($10,000 after taxes) before racking up that credit card debt. The difference is nearly AN ENTIRE MONTH.
Now you don’t really have an option, you have to pay your taxes, and you have to get yourself out of credit card debt. So get going and start paying off that credit card, and next time you think about buying something you can’t pay off right away, think to yourself: “what is the true cost of carrying this debt? Do I really value this purchase 55% more than what it is actually worth? Is it worth an entire month’s pay going down the drain?”
Now, I do have to say, the math above has been simplified to help clarify the point. Depending on what monthly credit card payments you are making, you may end up paying more or less than what is mentioned. If you only make minimum payments towards your debt it could take years and many more dollars to pay it off. If you end up missing a payment there may be other consequences as well, including fees and/or extra interest. Missing a payment may also affect your credit score. Check out Credit Karma’s Credit Card Repayment Calculator for a better picture of how long it will take to pay off your credit card debt.