The Advisor's Edge: The Truth behind your Credit Card Debt
The average American is carrying credit card debt upwards of $35,000. The annual cost we are paying on the debt is from 18%-28% of our balance.
Credit card companies spend more money on advertising than any other product or service sold in this country.
Why do they do this?
Because banks pay us 2-5% on the money we lend to them, called deposits. The banks then lend back to us at a cost significantly higher called a spread. The riskier the loan, like unsecured credit cards, the higher the spread. Auto loans and Home loans carry less risk to the banks, so these spreads and rates are lower. This is what banks do as a viable business model.
The problem is that the individuals who can least afford credit card debt, are the very ones paying the highest rates. They don’t make enough money to pay off their monthly balances.
The largest credit card companies, ranked by total credit card loans, include Chase, American Express, Citibank, Capital One, Bank of America, Discover, U.S. Bank, and Wells Fargo. Average APRs vary, but generally range from the high teens to the high twenties, with some store cards exceeding 30%.
Here's a more detailed breakdown:
Major Credit Card Companies and their Typical APR Ranges:
Chase: 20.99% to 28.49%
American Express: 20.49% to 29.49%
Citibank: 20.12% to 28.87%
Capital One: 19.99% to 29.99%
Bank of America: 18.74% to 28.74%
Discover: 18.49% to 27.49%
U.S. Bank: 18.74% to 28.37%
Wells Fargo: 16.24% to 25.49%
Factors Influencing APR:
Credit Score:
Individuals with higher credit scores typically receive lower APRs.
Card Type:
Rewards cards and travel cards often have higher APRs compared to cards with no annual fee.
Issuer:
Different issuers may have slightly different APR ranges for similar card types.
Market Conditions:
Interest rates can fluctuate based on overall economic conditions and the Federal Reserve's monetary policy, according to financial news sources.
Paying off a $1,000 credit card purchase with minimum payments can take a very long time and result in significant interest charges. For example, if you have an 18% APR and make only minimum payments, it could take over 12 years to pay off the balance, and you'd end up paying more than the original purchase price in interest, according to Cambridge Credit Counseling.
Example Breakdown:
Purchase: $1,000
APR: 18%
Minimum Payment: Varies, but let's assume it starts at $20 (2% of the balance).
Payoff Time (estimated): 12+ years.
Total Interest Paid (estimated): $1,396.
Total Cost: $2,396 (original purchase + interest).
So that $1,000 washing machine is costing you $2,396 if minimum payments are made.
This is why bank’s invest so much money in marketing their cards to all of us.
Resolving credit card debt: a step-by-step guide
Credit card debt can be a burden, but creating and sticking to a plan can help you become debt-free.
Here's how to begin tackling your credit card debt:
1. Understand your debt
List all debts: Gather your credit card statements and list all outstanding balances, including other debts like student or medical loans.
Identify interest rates: Note the interest rate (APR) for each card, as some debts are more expensive than others.
Review terms and fees: Understand your credit card's terms and any associated fees, as some credit cards, such as rewards cards, may have higher rates.
2. Develop a repayment strategy
Snowball method: Prioritize paying off your smallest debt first while making minimum payments on others. This can provide motivation through quick wins.
Avalanche method: Tackle the debt with the highest interest rate first while making minimum payments on others. This method can save you more money on interest in the long run.
Debt Consolidation:
Balance transfer: Move high-interest debt to a credit card with a lower or 0% introductory APR. Ensure you have a plan to pay it off before the introductory rate expires, as fees may apply.
Debt consolidation loan: Take out a personal loan at a lower interest rate to pay off multiple credit card balances, simplifying your payments and potentially saving on interest.
Debt consolidation can make your payments more manageable and help you save money while you pay off your debt.
Debt Management Plan (DMP): Work with a non-profit credit counseling agency to negotiate lower interest rates and establish a structured repayment plan with one monthly payment. You'll pay the counseling agency a fixed fee, and your credit card accounts will likely be closed.
Debt settlement: Hire a company to negotiate with creditors to accept less than the full amount owed. This can damage your credit score, but it may be an option if you are significantly behind on payments.
Bankruptcy: In extreme situations, filing for bankruptcy may provide a fresh start, but it has serious long-term consequences for your credit.
3. Implement your plan
Create a budget: Track your income and expenses to identify where you can cut back and free up funds for debt repayment. The 50/30/20 budget rule is a popular option where 50% of your net income goes to needs, 30% to wants, and 20% to savings and debt repayment.
Reduce spending: Make conscious choices to cut back on discretionary expenses like dining out or streaming services.
Increase income: Explore options like side hustles, overtime, or a raise to boost your debt repayment capacity.
Pay more than the minimum: Paying even a little extra each month can significantly reduce the total interest paid and speed up repayment.
Automate payments: Set up automatic payments to avoid missing due dates and incurring late fees.
Stay motivated: Celebrate milestones, break down your goal into smaller steps, and find an accountability partner.
Avoid using credit cards: Use cash or debit cards to prevent accumulating new debt while paying off existing balances.
4. Seek professional guidance (if needed)
Credit counseling: A non-profit credit counselor can help you assess your situation and create a personalized plan.
Financial advisor: A financial advisor can provide tailored advice and guidance.
5. Build financial resilience
Emergency fund: Build a savings cushion to avoid relying on credit cards for unexpected expenses in the future.
Responsible credit card use: Pay off balances in full and on time, and avoid unnecessary purchases.
Regularly review your finances: Adjust your plan as needed and ensure you stay on track to maintain financial health.
By diligently following these steps and adjusting them to your individual circumstances, you can regain control of your finances and work towards becoming credit card debt-free.
I hope this information helps you to start taking some positive action in managing your credit card balances. It will ultimately improve your monthly cash flow available for daily expenses and relieve financial stress.
Stay encouraged,
Until next time,
David