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What's So Bad About Credit Card Debt?

Is credit card debt really such a big problem? Unfortunately, it is. Americans owe more than half a trillion dollars in credit card debt. In 2004, Senator Akaka of Hawaii introduced the "Credit Card Minimum Payment Warning Act," saying: "Revolving debt, mostly comprised of credit card debt, has more than doubled from $313 billion in January 1994 to $753 billion in January 2004. A U.S. Public Interest Research Group and Consumer Federation of America analysis of Federal Reserve data indicates that the average household with debt carries approximately $10,000 to $12,000 in total revolving debt and has nine credit cards."

Once you've fallen prey to the easy-money attraction of credit cards, it's very hard to dig yourself out. It can be tempting to simply ignore your balance and pay the minimum requirement on your card. This is a dangerous approach, though. Let's consider an example.

Morris owes $5,000 on his Zirconium MegaCharge card, which extracts 16% in interest each year. If he manages to scrape together enough money to pay it all off in a year, he'll be forking over about $450 per month and will pay more than $400 in interest. In contrast, if he takes his time paying it off and does so over 10 years, he'll be paying roughly $84 per month and will end up paying a whopping $5,080 in interest. This means he will have paid more in interest than he originally borrowed!

Building up credit card debt is kind of like investing -- in reverse. With investing, your money grows. Mired in plastic, it shrinks. Think back to Morris and that $84 per month he paid on his debt for 10 years. If he'd been parking it regularly in the stock market and earned an annual average return of 11%, he'd end up with more than $23,000 after 10 years. (And if he'd invested it in the stock of a company like Wal-Mart or PepsiCo, he might have more than $30,000 or $40,000.)

Aim to pay off all your credit card charges in full each month. If you're in too deep to do that, try renegotiating your interest rate -- even a phone call could do the trick. If you have a sound credit history and explain that you'll be moving your debt elsewhere if your rate isn't lowered, the credit card company may knock it down a few percentage points. That can make a big difference.

Credit cards may be convenient, but they can also devour your financial future. Use them carefully.

If you or someone you care about is mired in credit card debt, learn more in our Get Out of Debt area. Learn much more about the surprisingly interesting credit card industry in our Credit Center, which also features tips on getting out of debt, along with guidance on how to manage your credit effectively. We even offer spiffy Motley Fool credit cards.

The following articles can also help you:

You can read about all things credit-related on our Credit Cards and Consumer Debt discussion board.

This article has been updated by Foolish research associate Katrina Chan. It was originally published on Feb. 1, 2006. Katrina owns no shares in any company mentioned. Wal-Mart is anInside Valuerecommendation. The Motley Fool has a full disclosure policy.


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