It's awful to be saddled with credit card debt. But you're not alone. A big chunk of America is struggling under the crushing load of credit card debt -- and "crushing" is a rather appropriate word, given that many of us are being socked with interest rates above 30%.
There's a small silver lining to this massive cloud: every dollar of debt you pay off will save you a lot in interest payments you won't have to make on it. For example, if your credit card's interest rate is 25%, by paying off $2000 of debt, you'll save yourself from having to pay $500 in interest on it -- this year, and next year, and the year after. That's sort of like earning $500, or 25%, this year and in the following years.
And if you think that I'm exaggerating by using rates as high as 25%, think again. As I noted in an earlier article, the average default interest rate (the rate you pay if you miss a monthly payment) for credit cards was about 30% in 2004, with many rates now in the 35% territory. Here are the rates for several major banks as of August 2005, per CardWeb.com:
Bank of America
- Providian: 30%
- Morgan Stanley's Discover: 26%
- Bank of America's MBNA: 20%
This earnings-by-paying-off-debt principle works on other kinds of debt, too. If your mortgage carries a 7% rate, extra payments you make on it are essentially saving you 7%. Of course, this is where mortgage-investing trade-offs enter the picture. If you're pretty sure you will earn, say, 12% in the stock market, you'll be better off investing your extra moola there instead of grabbing the 7% return. If you don't think you'll do much better than 7%, then remember that the 7% is much more of a sure thing.
If you (or anyone you know) are trying to dig out from under debt, visit our Credit Center, which features some surprisingly interesting info about the credit card industry and tips on getting out of debt. (You might also be interested in our own Fool Visa card, which is so snazzy that it serves as a conversation piece.)
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.