For many people, credit card debt becomes one more burden than they feel they have to bear. They become complacent and continue to have sales throughout their working lives and until retirement.
How do you get to the point where credit card debt is just a reality? An answer to this question can be found in the bills themselves.
When holding debt, most people look at the obvious numbers to determine what they are paying to maintain. The basic arithmetic of interest rates and annual fees can lead to a false sense of security. If you never look past those numbers, you’ll never have to face the real impact of your debt on your life.
Unfortunately, the cost of maintaining credit card balances involves a lot more than it seems. Here are five reasons your credit card debt is holding you back.
1. Actual interest costs
The interest charges you pay to hold your credit cards actually underestimate the true cost. To determine the true cost, you need to determine the income you need to earn to pay your annual interest charges on your credit card debt.
To get the answer, you need to take a look at your pay stub.
Income taxes and payroll deductions
Let’s say you have a credit card balance of $ 10,000 with an average interest rate of 10%. Your direct interest charges are $ 1,000 a year, so you’ll have to earn that much to pay them off, right? Wrong!
Let’s do the math. To clarify the point, I’ve put together some basic estimates for a typical citizen’s income equation: 28% federal taxes + 6% state taxes + 7.65% FICA taxes = 41.65%
That’s a combined tax rate of around 42%!
But wait … we’re not done yet. Let’s say you also have 10% of your salary invested in your company’s 401k individual retirement plan. That’s 10% plus 42% for income taxes, for a grand total of 52%.
This means that in order to pay that $ 1,000 of credit card interest on top of all of the above, you will need to earn over $ 2,000 (before taxes)! It’s a bit more complicated and a lot more expensive than the 1: 1 ratio you might expect.
One of the invisible costs of having credit card debt is stress. Once credit cards get too plentiful or you start having huge balances, concerns arise about how you will pay them off.
When this stage is reached, stress can turn into constant worry, loss of sleep, reduced productivity, and a cluttered mind. All of these can combine to affect your health and interfere with your job performance, introducing a whole new set of problems.
3. Lack of options
Being overwhelmed with debt interferes with your ability to do the things you want in life, both personally and professionally. Here are some of the things to keep in mind the next time you get a credit card offer:
- Job Change: Is there a great career field you’re dying to jump into? How would you like to be able to work less so you can spend time with your family? When debt takes over, career options are limited. You can find yourself stuck in a job you hate just because you can’t afford a pay cut.
- Moving: Likewise, you may not be able to move geographically due to lack of funds and high moving costs. When you record purchases, these credit card payments link you to your current physical location.
- Offer Help to the Family: What if someone in your family is unlucky, gets sick, or dies? With all of your income tied to monthly payments, you don’t have the capacity to help. It can be a terrible feeling, especially if your family is living on just one income.
All debt can contribute to these problems, but credit card debt is the biggest offender. Unlike auto loans and mortgages, there is no collateral that secures the debt that can be sold to pay it off.
4. Reduction in net worth
Most of us don’t think of credit card debt in terms of building long-term wealth because it is considered short-term debt. We could rationalize by saying, “I’ll pay off the credit card next month / next year” or “I’ll pay it off long before I retire (or take the next big step). ”
Whether we recognize it or not, credit cards represent a reduction in the value of our investment. A $ 50,000 investment plan accompanied by $ 20,000 in credit card debt means a net worth of $ 30,000. Add to that lifestyle inflation, and as our assets and income grow, so do our debts. There is a big difference between income and wealth.
5. Complication of life
It’s almost a basic human desire to live a simpler life, and most of us can easily see why. Each component added to our lives brings its own set of complications, and credit cards are no exception.
Think about everything that goes on in your daily life. Are you sure you want to meddle with the credit card companies in a dispute? With every credit card you use, the potential problems and complications multiply.
At the very least, a credit card balance means an extra bill is added to the stack you already have for things in your life that aren’t optional, like utilities and medical bills. You are also more susceptible to credit card fraud and scams that are becoming more and more common.
It is important to remember that unlike many aspects of life, your financial situation is completely in your control. You have the power to make the decision not to take out the next credit card. If your ultimate long-term financial goal is a simpler life with fewer bills and fewer entities to manage, having credit cards won’t help.
Now that you have an idea of the true cost of credit cards, use it as a motivation to take control of your finances and finally pay off your debt for good.
Have you suffered the emotional and financial costs of credit card debt? What motivated you to take control? Share your story in the comments below!