A Way to Look at Credit Card Debt that Should Scare you In to Beating it

The average credit card APR these days is ~17.69% (with many north of 20%).


Actually, with monthly compounding balances, the effective APR is almost 1 percentage point higher. So let’s say 18%.

What this means, in simple real-life terms, is that for every $1,000 of debt you keep on a credit card balance, you accrue an additional $180 of debt per year in the form of interest.

Taking it a step further, you would tack on $1,000 in interest payments (2X the original charged amount) every 6.25 years on every $1,000 accrued.

If you have credit card debt, that should be alarming enough for you to stop dead in your tracks, sell off all of their worldly possessions, and attack that debt from all angles like a rabid and starving Tasmanian devil on roids until the balance is paid in full.

Yet… for many, it’s not enough. The average credit card balance for Gen X is $5,343 and Gen Y is $2,682.

Is there Such a Thing as Justifiable Credit Card Debt?

There are indeed circumstances that would lead to an individual accruing credit card debt that they cannot pay off in full every month for a period of time that are justifiably excusable. Situations that come to mind include:


  • an individual that is out of work and emergency funds and needs a lifeline until they start earning a regular income again
  • a student or job trainee unable to take on more paid work due to a very demanding program or course load, or who has taken on a high profile unpaid internship
  • a low wage earner with no savings, who is hit with unexpected necessary expenses (medical, transportation, unexpected household repair)
  • you will come home to a horse head in your bed if you don’t pay off the mafia today

In these cases, the credit card debt would be justifiable, but only if all other options were exhausted first (selling off possessions, cutting expenses to only the bare essentials, moving to cheaper location, unable to tap a lower interest home equity line of credit).

For everyone else, you’ll have a hard time convincing me that credit card balances are justified (but try me in the comments, if you dare).

The Best Way to Look at Credit Card Debt, for the Masses

2X the original charged amount every 6.25 years might be eye opening and even motivational for many, but is it enough to develop a pure hatred for credit card debt that inspires immediate and continual action? Maybe not.

So lets try this way of looking at it…

Every dollar you spend or allocate to ANYTHING other than paying off your credit card debt comes with a personal 16% annual tax penalty. And each year after, you get taxed another 16%.

Ouch! Who likes taxes? And an additional 16%? That’s more than many people pay in income taxes! (the average effective tax rate for all but the top quintile (20%) of income earners in the U.S. is less than 16%). It’s like Uncle Sam just cloned himself, dressed up as a bank CEO, and taxed you all over again.

So think about this for a moment…

The discount new pair of shoes ordered online last night? 16% annual tax.

The morning latte? 16% annual tax.

The Chipotle burrito for lunch? 16% annual tax.

The takeout food on the way home? 16% annual tax.

The gas that fuels the long commute? 16% annual tax.

The latest, greatest phone and cell plan. 16% tax.

The concert tickets ordered. 16%.

The cable TV. 16%.

Even personal savings? 16% tax!

On the last one, I’m not just talking about things you buy with a credit card, but even things you buy with cash or the cash you are putting elsewhere. Why? Because that cash is being diverted from paying off your credit card balance to something else.

There is only one exception to the rule: 401K matching with rates that dramatically exceed your credit card APR’s – so long as you keep the funds invested.

As a species, humans are great at compartmentalizing things. And when it comes to personal finance, we like to compartmentalize even more: “I have this credit card balance here, savings there, and my expenses over there.”

Sometimes, compartmentalization can really work to your benefit (i.e. saving towards specific future goals). But when it comes to high interest debt, you’d be best off to throw compartmentalization out the window, because the reality is that all of your finances are connected. A dollar spent on anything other than paying off debt carries a penalty. How much of a penalty?

You guessed it.


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