Retired Guy

Is your credit card debt costing you years of retirement?

Jan. 3, 2019

1083 words long, 5 minute read

Most people know that holding credit card debt can be a difficult hole to dig yourself out of. Even being a few hundreds dollars in debt can quickly balloon out of control if not managed properly. With the average APR being 15.96%, if you only make minimum payments you could be paying hundreds of dollars (or more) in interest alone. This is why debt can be so crippling and difficult to get out of. Any debt could set someone back years in building assets.

While most people know that accruing credit card debt isn't a good thing, sometimes there is no choice. Emergencies happen and people need to use their card to pay for unforeseen expenses. It's unfortunate, but life happens. The key to when these expenses happening is building a plan to pay off the debt as fast as possible. Even small amounts extra towards the balance can make a massive difference. Not only will you save money on interest, but investing that interest could become thousands of dollars over time. That money could mean you can retire earlier, or at the very least give a lot of padding to your account.

We are going to run the numbers on a scenario that many people find themselves in. Our example person, Susan, has had an unforeseen medical bill and engine repair all in the same month. Without much in the way of savings Susan is left to pay the $2,500 bill on her credit card. She also already had a running balance of $2,500 from a similar scenario a few months ago. Here are the details:

  • Credit Card balance of $5000
  • Apr of 15.3% (just under the average)
  • Minimum payment of $100 a month

How much does credit card debt really cost?

If we run the numbers for our scenario, if Susan pays the minimum ($100 a month) her payback graph looks like this:

Debt payment graph

Starting amount: $5,000 | Paying per month: $100 | APR: 15.3%

Months to pay off debt: 81 | Total Interest paid: $3,009.3

Here is the abbreviated table of the monthly breakdown for Susan. I will show only the first 9 rows for brevity, but it gives you an idea of how much interest she is paying.

Month Balance before Interest Payment Balance After
1 5063.75 $63.75 100 $4963.75
2 $5,027.04 $63.29 100 $4,927.04
3 $4,989.86 $62.82 100 $4,889.86
4 $4,952.20 $62.35 100 $4,852.20
5 $4,914.07 $61.87 100 $4,814.07
6 $4,875.45 $61.38 100 $4,775.45
7 $4,836.34 $60.89 100 $4,736.34
8 $4,796.72 $60.39 100 $4,696.72
9 $4,756.61 $59.88 100 $4,656.61

In total, it will take Susan 81 months to pay off the debt. That is 6 years and 9 months for those keeping track. She will pay over $3,000 in interest on top of the original $5,000 sum. Over 50% of the original balance alone was interest to pay off this debt. This also assumes that Susan doesn't have any other unforeseen expenses that require her to tack on more debt.

If you think this scenario seems out of the ordinary, it isn't. The average American holds $6,375 of credit card debt, a full $1,375 less than our example! This means that the payback period for most Americans will take longer and cost more in interest than Susan is paying.

The opportunity cost of credit card debt

To understand how damaging credit card debt can be to one's future we need to run the numbers. If Susan were able to instead invest her $100 a month over the next 7 years (6.75 rounded up for calculation purposes), she would have $11,111. This is a net worth swing of $19,120 ($11,111 + total credit card payoff cost of $8,009). $19,120 is no small sum and can make a world of difference, especially if that money has time to grow further in the market.

Here is the compound interest graph if she were to invest:

Compound interest graph

Starting amount: $0 | Additional yearly: $1,200 | Growth Rate: 7.0%

Value after 7 years: $11,111.77

If you extrapolate this out a further and calculate the impact of $100 a month over the average working life (~30 years) the numbers become insane. That simple $100 a month becomes $121,287 after 30 years. This is why staying consistent is so important for building wealth. Small changes in our habits can have massive impact down the road.

Compound interest graph

Starting amount: $0 | Additional yearly: $1,200 | Growth Rate: 7.0%

Value after 30 years: $121,287.65

The opportunity cost of having debt is massive. Paying towards debt every month is money being taken away from other places where it could grow. In Susan's case, it can easily cost her over $100,000. While this may be a luxury for some, there is often a way to pay down the debt faster or avoid it all together.

How to avoid these situations

For many people, it can be extremely difficult to avoid a situation like this. Real wages for most American's haven't kept up with the cost of living and money is tight for many American's. With no other way, many people turn to credit cards to make ends meet in months where work is slow or when unanticipated expenses come up. No matter what your wage is, there are some steps you can take to try and avoid a situation like Susan's.

When times are good, sock money away

If you are able, try to save money when times are good. Cars break down and accidents happen. Saving an emergency fund is important to be able to deal with unexpected costs. As we've seen, even $50 or $100 a month can make a difference.

If you have a balance, find a 0% APR card

If you are holding some debt already, there are options. Many banks offer a 0% APR card for new customers. If you can get approved, you could transfer your balance to buy yourself sometime (often 24 months) to pay off your existing debt. Please know that many of these cards charge a fee of 2-4% of the total balance. This is much lower than paying the APR of most cards out in the market and can be a great option to not accrue interest. 

Pay more than the minimum

I left this one for last because it is often the hardest. If you are able, pay more than the minimum payment. Credit card companies want you to be paying the minimum so you pay them interest. Think of the minimum as a last resort. Paying more than the minimum can drastically reduce the time and interest you will spend paying back your debt. In Susan's case, paying $150 a month ($50 more a month) will save her 3 years and nearly $1,500 in interest on her $5,000 debt.


If you find yourself sitting with some credit card debt, use the tips above to try and get rid of it as fast as possible. If you want some insights on how much you can save, use our credit card debt calculator. If you can find a way to work down the debt you can use that money to build yourself a nest egg that can grow over time through the magic of compound interest. 

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