In today’s world where credit card companies are pros at touting the benefits of having and using credit cards, it’s very easy to get caught up in the “I can afford the payment so it’s okay,” mentality.
But the truth of the matter is that owing a balance on your credit card for the long term carries with it much more of a financial impact than you might think. The long-term cost of not paying off your credit cards can put a serious crater in your goal to become financially stable.
The problem is big
The U.S. Census Bureau tells us that the average household with debt carries a credit card balance of $15,762. According to Bankrate, the average credit card interest rate in May of 2016 on a variable rate credit card is 16.01%.
That amounts to over $2,500 per year in interest on an unpaid credit card balance at the national average. How does that interest paid impact your financial picture over the long term in real life? Let’s look.
The impact of interest paid
If you were to carry that national average balance of $15,762 on a credit card, pay the average variable interest rate of 16.01% and pay only the minimum required payment of 2%, here’s how that interest would affect your finances over the long term.
According to the above chart, you would pay nearly $30,000 in interest over the life of the credit card loan if you paid only the minimum payment due, and it would take you over 30 years to pay the credit card off in full.
The impact of opportunity cost
If the above numbers regarding interest paid on a credit card don’t scare you, maybe this will. Now we’re going to talk about the opportunity cost that comes with not paying off your credit cards in full each month.
Let’s say, for example, that you were to invest $15,762 in a mutual fund or the stock market instead of spending $15,762 on miscellaneous credit card purchases. You kept your money in the mutual fund for the same 30 years in which you would have paid minimum payments on a credit card balance of the same amount, and you earned a reasonable interest rate of 7% on your investment.
The chart below shows how much money you’d have in your investment account after 30 years.
What does this mean as far as opportunity cost is concerned? Let’s take a look.
Add the interest paid during the life of the credit card balance ($28,770.33) to the interest earned from investing the initial amount in a mutual fund instead of spending it on miscellaneous items: ($104,222.00)
The result? Your opportunity cost loss is $132,992.33!
So, in essence, your $15,000+ in credit card purchases can potentially cost you over $132,000, when combining the loss of money via interest paid and the loss of money that you would have earned from investing the money you spent via credit cards.
That’s a startling loss of money for the convenience of living life on borrowed money.
There are other opportunity costs too in that you miss out on valued experiences for yourself and your family. The money paid in credit card interest could be invested to pay for a child’s college degree so that they graduate free of student loan obligations. The money could also be used to provide paid-in-cash vacations that will build lifelong memories for your family.
It’s your money, but who will get it?
The question that’s best asked is: Who do you want to benefit from the cash you work so hard to earn?
- Are you satisfied with giving it to credit card and loan companies on a monthly basis for the next 30 or more years?
- Or do your working hours mean enough to you that you’d rather keep those interest payments for the benefit of yourself and your family?
If you chose answer B, good for you (and for your pocketbook). Now let’s talk about a few ways in which you can avoid accumulating credit card debt and have more money to save and invest each month.
1. Choose to live below your means
Living below your means doesn’t have to be difficult. With a sound budget and the willingness to spend less than you make each month, you give yourself the benefit of avoiding credit card and other debt and having cash available to build wealth and save for bigger purchases.
2. Choose to save a certain percentage of your paycheck each month
Make saving money a priority and a habit. Sometimes it’s easier to stick to a savings plan if you have the percentage you want to save deducted from your checking account or paycheck each week and deposited automatically into a savings account.
3. Choose to drive older, reliable cars
New cars are another chink in the armor of those who want to reach financial freedom and avoid debt. Instead of saddling yourself with a large car payment each month, choose to drive older reliable cars that you can pay cash for, and avoid giving your money to auto loan companies in the form of interest payments.
4. Don’t hang out with the Joneses
If you’re working hard to keep up with the Joneses, you’ll be more tempted to take out loans and use credit cards. Avoid that trap by keeping a keen eye on your personal financial goals and not worrying about the accumulation of stuff by others in your life.
As you can see, carrying a balance each month on your credit cards can result in major financial losses for you and for your family. Choose instead to live within your means and avoid paying interest on credit cards. Then sit back and watch as your net worth grows.
Read more: Clark’s investing guide
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