The Real Cost of Credit Card Debt

I was astounded not long ago when I discovered how much a $5000 credit card balance actually costs the cardholder over time. (I like doing this weird kind of calculation stuff.) Follow this math down the rabbit hole.

If you have a card with a $5000 balance at 18% and make $100 payments each month, what do you think is the final tally to retire your balance and how long will it take to pay off?

Assuming you make no other charges after you begin to whittle away at the debt, it will take you 93 months, almost 8 years, for a grand total of $9300 paid out. That's an unbelievable $4300 in interest.

Now, if you were to invest $100 each month instead, in a mutual fund that grows at a modest 8% annually, in the same approximately 8 years, you would have $13,400.

To finance $5000, it will cost you $8,400.

Where did I get the $8,400? That is $4300 in interest that goes to the credit issuer plus $4,100 that your $100 monthly investment could have earned, if you had put your money in a mutual fund instead of sending it to the credit card company.

This is a cost of debt that your card companies won't share with you. They don't have to. It's not in their best interest to tell you that they are taking your retirement savings from you slowly and steadily every month.

Get out your latest credit card statement. See how much you paid in finance charges over the last month. If you have multiple cards, this could be scary.

This is money that you are not saving in an IRA, spending on groceries, buying shoes for your kids, giving to your favorite charity, or taking your family out for a movie on a Friday night.

You are your own best advocate. The tools of your defense? A pencil, a piece of paper, and a calculator.