No creditcards here!
November 21st, 2006 by Remon
I received an email today regarding my PPC arbitrage update post, with the question: why didn’t you pay with your creditcard? It’s much faster…
Well, because I have no creditcard and I don’t want one either. The interest on creditcard debt is on average 17% to 20% (2004). That’s nice for visa and mastercard but not for you, the consumer.
In 2004 the average american family with a creditcard had a creditcard debt of $4000. That’s $800 a year in interest only. Most creditcard companies want you to pay of 3% or $10 a month, whichever is more. Let’s do some numbers for the first month:
Debt: $4,000
Interest: $66.66 (20% of $4,000 / 12)
Payment: $120 (3% of $4,000)
Remaining debt: $3,946.66 ($4,000 - ($120-$66.66))
As you can see, they pay more interest then debt repayments. If they keep paying the minimum each month, it takes 15 years to absolve the $4,000 creditcard debt and they have paid $4,480 in interest. Are you starting to see why I don’t like creditcards?
If that wasn’t enough, creditcard debt is paid with aftertax dollars. If the family from the sample above is in the 50% tax bracket, they had to earn $8,960 only to pay the interest on their $4,000 creditcard debt. So the 20% interest rate is actually 40% in their case! I don’t know many investments with such a return.
For this same reason, I don’t really like mortgages. If you do need a mortgage, pay it off as quickly as you can. The same goes for creditcard debt, pay it off as soon as possible, that’s the best investment you can do.