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a senior couple reviewing their debt to try to make it disappear

Making debt disappear is a big investment in your future

by Susan Wright | Contributor
August 08, 2022


While you may be saving and investing for retirement, even if your portfolio is performing well, you could actually be doing yourself a disservice if you are also carrying high-interest credit card debt.

According to some financial advisors, credit card debt can be one of the biggest challenges to securing a worry-free retirement. This is because for every dollar that you put toward the repayment of this debt, it is a dollar less that you could be setting aside for the future.

Some of the world's most respected investors like Warren Buffet are even weighing in on the damage that credit card debt can do to your overall financial security - both now and down the road.

So, if you are carrying a mountain of credit card debt - or even if you have a smaller debt obligation, but you are not fully paying your balance off each month - it is important to understand how it can spiral out of control, and how to prevent that from happening so that you can focus more on growing and protecting your savings.

Just how bad is the credit card debt crisis in the U.S.?

Americans carry a lot of credit card debt - to the tune of more than $840 billion as of mid-2022. Based on statistics from Experian, the average number of credit cards held by individuals in the U.S. is three, with an average credit card balance standing at more than $5,200.

Your age and generation could have an impact on how much credit card debt you hold, with Generation X leading the pack at over $7,200 (on average), and Generation Z, those who are between the ages of 18 and 24, holding the least amount, on average, at $2,312.

Average Credit Card Debt by Age Group (in the U.S.) in 2021

Generation Average credit card debt
GenerationSilent generation (age 76+) Average credit card debt$3,821
GenerationBaby boomers (age 57 to 75) Average credit card debt$6,230
GenerationGeneration X (age 41 to 56) Average credit card debt$7,236
GenerationMillennials (age 25 to 40) Average credit card debt$4,569
GenerationGeneration Z (age 18 to 24) Average credit card debt$2,312
Source: Bankrate

Unfortunately, even if you carry a relatively “low” amount of debt on your credit cards, it can have a negative impact on other areas of your financial life. For instance, the interest charges alone can cause your purchases to cost you more. Plus, the more money you must put toward your credit card expenses, the less you will have available for other wants and needs - including saving for retirement.

In some cases, credit card debt may be heightened through no fault of your own. For instance, the COVID-19 pandemic changed the way that many Americans managed their finances - including their credit cards.

Although some people who did not suffer very much - or any - economic fallout during 2020 and 2021 were able to use stimulus funds to pay down their debts, others found themselves unable to pay their everyday living expenses and were forced to put more items like food and utility bills on credit cards.

A September 2021 survey showed that roughly 42% of U.S. consumers who had credit card debt prior to the COVID pandemic ended up adding to the amount that they owe, with 47% stating that the health crisis caused them to go deeper into debt.

In addition to making it more difficult to save for retirement, carrying one or more credit card balances can also have other negative ramifications, too. For instance, an inordinate amount of “unsecured” debt - versus debt that is secured by a home or other type of asset - can reduce your credit score.

This, in turn, can have a domino effect, because a lower credit score will usually equate to you being charged a higher rate of interest on loans and credit cards. So, it can really present a “catch-22” in terms of having to pay more all the way around. And paying more for debt also equates to having less money available to put toward retirement savings, an emergency fund or college funding for a child or grandchild.

How credit card debt can spiral out of control

Credit card balances are considered a type of unsecured debt. With secured loans, you must typically offer something of value to use as collateral on the money you are borrowing. As an example, an automobile loan is “secured” by the vehicle - and, if the payments are not made, the bank or lender can repossess the car. Because secured loans have collateral attached to them, the interest rates that are charged are typically lower than rates on unsecured debts.

Other types of secured loans can include:

  • Home mortgages
  • Home equity loans/home equity lines of credit
  • Business loans

Conversely, unsecured debt does not require collateral. So, if the borrower defaults or stops making payments, there are no actual assets for the lender to seize (although there are some other potential negative consequences that could occur). Therefore, this type of debt will usually come with higher interest rates - primarily because it is much riskier for the offering bank or lender.

As of 2022, the average credit card interest rate in the U.S. was nearly 21%. This is the highest rate over the past few years. So, if you are planning to get a new credit card, it is likely that you'll have to pay more interest than you would on a card that you have already owned for several years.

One reason for the rise in credit card interest rates is the Federal Reserve's interest rate hikes that took place in 2022. If the Fed continues to increase rates, credit card interest is likely to continue to follow suit.

If you carry a balance on one or more credit cards, then, the interest charges can add up quickly. With most cards, you are charged interest if you do not pay off your balance in full every month.

Many credit card issuers will multiply your balance by each day via a daily interest rate, and then they will add that amount to what you already owe. This daily rate is your annual interest rate (i.e., the APR), divided by 365.

In this case, the credit card company will charge a certain amount of interest on the unpaid balance, and then it adds that interest charge to your overall obligation that is due. Then, if you don't pay off your balance in full the following month, you can end up being charged interest on top of the interest you were charged the previous month, and so on. This is how the amount of credit card debt can increase quickly, and eventually spiral out of control.

As an example, if you spend $500 on a credit card that has an annual percentage rate of 22.99%, the amount that you owe after just one year can grow exponentially, climbing to more than $627 by the end of 12 months.

Month Times 22.99% APR is charged Balance Owed
Month0 Times 22.99% APR is charged0 Balance Owed$500
Month1 Times 22.99% APR is charged1 Balance Owed$509.58
Month2 Times 22.99% APR is charged2 Balance Owed$519.34
Month3 Times 22.99% APR is charged3 Balance Owed$529.29
Month4 Times 22.99% APR is charged4 Balance Owed$539.43
Month5 Times 22.99% APR is charged5 Balance Owed$549.77
Month6 Times 22.99% APR is charged6 Balance Owed$560.30
Month7 Times 22.99% APR is charged7 Balance Owed$571.03
Month8 Times 22.99% APR is charged8 Balance Owed$581.97
Month9 Times 22.99% APR is charged9 Balance Owed$593.12
Month10 Times 22.99% APR is charged10 Balance Owed$604.49
Month11 Times 22.99% APR is charged11 Balance Owed$616.07
Month12 Times 22.99% APR is charged12 Balance Owed$627.87
Source: Credit Card Queen

Further, the interest on many credit cards is variable, and therefore it can change from time to time. And, if you use your credit card to make purchases, as well as for obtaining cash advances, it is likely that you will pay different rates for each of these types of transactions.

In any case, if you do not pay off your credit card balance every month, the amount that you owe can snowball quickly. Plus, delaying saving for retirement can also come with some significant pitfalls.

As an example, if an investor starts saving $200 per month at age 20, assuming an annual return of 6.5%, they would have approximately $570,000 at age 65. However, by waiting even five years to start saving, at age 25 - with all of the other factors being equal - the resulting savings at age 65 would fall to $435,000. This represents a difference of roughly 23%.

By waiting even longer - until age 37 - to start setting aside that $200 per month, the grand total when reaching age 65 would be just $180,000 - less than one-third of what could be generated by getting these savings underway at age 20.

So, with that in mind, if you have the means to pay off your credit card debt sooner rather than later, it could make a tremendous difference in your overall financial security - both now and in the future.

Interest rates and APR - not necessarily the same thing

It is important to understand that the interest rate on a credit card and the annual percentage rate, or APR, may not necessarily be the same thing - but they can make a big difference in what you may expect to be charged on your unpaid balance versus what you are actually charged.

For instance, interest rate and APR can both represent the “cost” of borrowing money. An interest rate is expressed as a percentage, and it is charged on the principal amount of a loan. So, in the case of credit cards, the “loan” amount would be the unpaid balance.

The APR, or annual percentage rate, is similar to an interest rate. However, APR represents a boarder measure of the cost of borrowing money. This is because the APR doesn't just take into consideration the interest rate on the loan, but also other factors like lender fees.

In some cases, then, the annual percentage rate and the interest rate on credit card debt may end up being the same. But in other instances, such as those where additional fees are charged, the amount of the two can differ.

Are you carrying too much credit card debt?

There are numerous factors that can play a role in the amount of credit card debt that you carry - as well as your ability to pay it off. In any case, though, it is essential that you make paying off this debt a top priority, because the way that you manage your credit card obligations can impact other areas of your life.

Setting up regular financial check-ins with yourself can help you with determining whether or not you are going in the right direction when it comes to reducing debt and increasing your savings for the future.

If you find that you are carrying too much credit card debt, be sure that you put a strategy in place to reduce - and eventually eliminate - it. Otherwise, it could wreak havoc on retirement savings, your ability to make large purchases, and even whether or not you are able to leave an inheritance for those you care about.

It is important to note that if you are currently struggling financially, then your primary focus should be on paying your living expenses - such as housing, utilities and food - as well as other necessities like health care.

Some of the banks and other credit card issuers may work with you on reducing the interest rate and other fees on your credit card - and/or possibly even reducing your overall balance - if you contact them and let them know that you are in a financial bind. This can help to relieve at least some of your financial burden.

Strategies for getting - and staying - out of high interest debt from credit cards

According to Warren Buffet - the man who is considered by many to be the greatest investor of all time - the first thing he would do if he were carrying high interest debt is pay it off. One reason for this is because ridding yourself of debt that is costing you 18% or more is likely going to fare far better than any investment that you might make.

In other words, by paying off this balance, you would essentially save more money on the interest that is due on the debt than you could generate in the stock market, in real estate or elsewhere.

a cartoon of someone being freed from credit card debt

Paying off a credit card balance is in some ways like obtaining a guaranteed rate of return on an investment. For instance, if you are being charged 20% interest per year on your card, and you pay off your balance in full, then you are guaranteed to “save” yourself 20% - which, in turn, is like the equivalent of generating a 20% return.

So, how can you go about ridding yourself of high-interest credit card balances?

There are a couple of strategies that may help. One option to is make an effort to pay more than just the minimum balance on the card every month. This will help you to chip away at the principal that is owed, until you have eventually paid it all off.

Credit card companies are now required to show their customers how long it would take (and how much it would cost) to repay their balance by only making the minimum payment each month as versus paying more than the minimum due.

As an example, assume that you have a $10,000 balance on your credit card. This particular card has an annual percentage rate (APR) of 15%, and the minimum monthly payment is 4% of the amount of balance that is owed.

In this scenario, it would take more than 12 years to fully pay off the $10,000 balance if you just make the minimum payment every month (and assuming that you do not make any more purchases on the card, which in turn, could increase the balance that is due).

By making the minimum payment, the monthly amount that is owed will gradually decrease as the total amount of balance is reduced. However, going this route can cost you more than $4,400 in just interest charges alone.

Another strategy could be to continue paying a flat $400 every month. In this instance, you will be putting more toward paying down the principal every month as the total amount of balance is being reduced.

By using this strategy, the time that it would take to fully pay down the balance can be greatly reduced - from approximately 12 years to less than three. And, if you opt to pay even more on the card every month, both the amount of time that it takes to deplete the debt - along with the amount of interest that you end up paying - will all be reduced even further.

Monthly payment Minimum payment (starting with $400) $400 (fixed amount) $500 (minimum + $100) $750 (minimum + $250)
Monthly paymentTotal amount paid Minimum payment (starting with $400)$14,452.37 $400 (fixed amount)$12,065.31 $500 (minimum + $100)$11,579.47 $750 (minimum + $250)$11,008.54
Monthly paymentTotal amount of interest paid Minimum payment (starting with $400)$4,452.37 $400 (fixed amount)$2,065.31 $500 (minimum + $100)$1,579.47 $750 (minimum + $250)$1,008.54
Monthly paymentHow long before the debt is paid Minimum payment (starting with $400)148 months (12 years and 4 months) $400 (fixed amount)31 months (2 years and 7 months) $500 (minimum + $100)24 months (2 years) $750 (minimum + $250)15 months (1 year and 3 months)
Monthly paymentTotal savings Minimum payment (starting with $400)N/A $400 (fixed amount)$2,387.06 $500 (minimum + $100)$2,872.90 $750 (minimum + $250)$3,443.83
Source: National Debt Relief

If you are carrying balances on multiple credit cards, you may opt to take the card with the lowest balance and put more money toward paying it off, while only making the minimum monthly payment on the others.

Then, once the balance on the first card has been fully paid down, you can allocate a larger payment to the card with the next-lowest balance and work toward fully paying that card off. You can repeat this process until you have all of the cards' balances paid down.

Another potential option for ridding your credit card debt more quickly and easily could be to obtain a debt consolidation loan. With this type of loan, all of your balances could be “rolled” into just one single loan with one monthly payment to make.

If you opt for this solution, though, make sure that you are familiar with all of the loan's terms - including the length of time you have for repaying the loan. This is because the overall amount that you end up paying could still be higher than if you continued to pay on multiple credit cards.

It is also possible that you could “find” more funds to use for eliminating your credit card debt more quickly, and in turn, starting to save for the future. For instance, if you receive a bonus at work, if you get an income tax refund or you obtain some other type of “windfall,” you could put this money toward paying down your balance.

It may also be possible to come up with needed funds by selling items that you no longer use and/or reducing your everyday living expenses. Then you could put that money toward paying the credit card bill.

Some of the ways you may be able to accomplish this include:

  • Taking your lunch to work every day, rather than buying it
  • Reducing your cell phone and/or cable TV package (and in turn, reducing your monthly bill)
  • Carpooling or taking public transportation more often (if applicable) so that you can save on gas purchases
  • Watching movies and sporting events from home rather than attending these events live and purchasing tickets

Once you have wiped the slate clean from credit card debt, it is a good idea to get in the habit of paying your balance off in full every month. That way, you can prevent yourself from racking up a large debt obligation again.

How to reduce debt and increase your savings going forward

Paying off credit cards - and any other type of high-interest debt - can make a big difference in your overall financial security going forward. So, if your goal is to get on track financially and start saving for retirement, it may be a good idea to discuss your situation with a professional who can help you to put a plan in place that is based on your specific goals, needs, time frame and risk tolerance.

Alliance America can help

Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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