Credit card interest is costing you more than you think. There are two factors that impact how much you are really paying, and both of them add up quickly.
The first factor is the most obvious: the interest rate. Naturally, a low rate will cost you less—our numbers indicate a $10,000 balance with a 5.9% interest rate will cost $10,637 in total if paid off in 2 years.
That may not sound too bad, but bear in mind that 5.9% interest is extraordinarily difficult to get these days. Even people with excellent credit scores will likely pay “double digit” interest rates of over 10%. And if you’re paying a more typical 12.9% in interest on that same $10,000, you’ll pay a total of $12,797 over the same 2 years.
The second factor to consider is how long it will take you to pay off the debt. We were using 2 years as our example above, but our credit counseling clients typically need four or five years to pay off their revolving debts. That compounds the interest paid even further. Add in higher interest rates, and you end up paying double, triple, even five times the original amount to pay off the debt.
Many people carry interest-bearing debt from month to month, and it can linger for years. Add in unexpected expenses, and suddenly your debt is growing instead of shrinking, and you’ve added even more years onto the term.
It is crucial to focus on paying down debts, so if an unexpected emergency comes along and you are forced to rely on a credit card to meet the need, you won’t be stuck with that debt for years, paying interest that will compound how much you owe many times over.
The Cost of Not Saving
There’s another way credit card interest is costing you—every dime you pay toward interest on debt is money you aren’t saving. Recently during America Saves Week, we encouraged consumers to set goals to save more money. Research we cited indicates that the typical millionaire saves or invests 20% of his/her income. Meanwhile, the average American saves less than 5%.
You might reply that it’s easier for wealthy people to save than those who earn an average income, but the truth is, most millionaires didn’t accumulate their wealth by paying heavy credit card interest—they eschew revolving debt and put aside the savings. By focusing on saving instead of borrowing, you can get credit card interest payments out of your life and set yourself up for financial freedom.
Call us today if you’re having trouble making credit card payments and you’re tired of paying heavy interest. We have free counseling and options like debt management plans that can help you pay off your debts.