Financial Gain Without Pain

Oct 4, 2013 by

a debt free womanHow Much Do Americans Pay in Credit Card Interest?

According to the most recent Federal Reserve statistics, Americans’ outstanding credit card debt totals $850 billion.

And according to CreditCards.com, the most recent national average interest rate on new credit cards is 15.02%.

Those two numbers combined would translate to about $130 billion in total credit card interest expense paid annually by Americans.

That’s a gross, and surely incorrect, estimate of Americans total credit card interest payments, for lots of reasons. So let’s say $130 billion +/- 20%. That works out to be $100-$160 billion in interest Americans are handing over to credit card issuers each year.

Combine this estimate with the roughly 220 million Americans who are age 18 or older.

That would mean voting age Americans pay annually in credit card interest:

→ $450-$709 per year, per person. (Wow.)

How to Bump Your Nest Egg by ~$100,000

Now let’s say an average young American paid off—and continued to pay off, each month—his or her average credit card debt and contributed the saved interest cost to a Roth IRA for 40 years. If the Roth earned just 5% annually, the account balance at the end of 40 years would be in the range

→ $54,000-$86,000

If a 7% annual return were achieved, the account balance would reach

→ $90,000-$142,000

Moral of This Story

Because I’m lazy, I’ve played fast & loose with the numbers here and my results are gross estimates only. But I think the takeaway message is valid:

Simply by not carrying a credit card balance over your adult lifetime—not by abandoning your latte or skipping a (saved for) Disney trip or wearing only second hand clothes or otherwise adopting all the habits of discipline and denial we money bloggers are constantly harping about—you could fund a meaningful chunk of a retirement nest egg.

Pay off your high-interest debts like credit card debt as soon as you can. It’ll make a big difference.

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  • Stuart Laing

    That’s astonishing, average interest rates of 15%. So by the time you take income tax into account, repaying $1 of the principal debt is like getting a return on your investment of more than 20%.

    It’s no wonder that the finance industry has become so big and powerful.

  • Joe

    Good call. I don’t understand why so many people carry balance on their credit cards. I guess the bank needs to make money somehow.

    • I know some people run up balances because they have some bad luck like a lay off or major, unexpected expense. These folks then work hard to pay it down once things get back to normal.

      But then there are the folks we all know and who make the credit card issuers’ business for them. They even have a name for them in the banking industry: “Revolvers.” These are cardholders who carry a balance and pay only the minimum payment, i.e., the industry’s bread & butter. For this cohort, what you can spend is limited only by how much credit you have, a very costly lifestyle because everything they buy on the card is costing them a significant premium–the card’s APR.

  • I am lucky not to have a lot of credit card debt. I saw how my parents struggled with it and avoided it all together. 15% is a lot to pay for credit. Especially if you hold the balance for a long time. People don’t realize this because they only see it month by month instead of over the longer term.

  • I never, ever carry a balance. There’s nothing I hate spending money on more than interest. It seems to me like flushing cash down the toilet. I make a point of never, ever carrying a balance to avoid this. I’m very diligent with it. Good to see it’s paying off!

  • Travis Pizel

    Oh my….there’s that sick feeling in my stomach again realizing how much I’ve really impacted my future with this credit card debt. I’ll be pouring money into those retirement accounts after February…..

    • Maybe think of all the interest cost you’ve saved by paying off your credit card debt? Some never take that step!

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