Credit Card Debt is the Devil
If there is one piece of personal finance advice I have to give, it is to stay out of credit card debt, period. Consumer debt is unattractive in and of itself, but credit card debt is a whole different animal.
Ridiculously High Interest Rates
According to ValuePenguin, The average annual percentage rate (APR) is around 15%-16%, but can get as high as 20% depending on the creditworthiness of the cardholder and type of credit card in question.
Cash advances run even higher. According to a recent CreditCards.com survey, the average annual rate on a cash advance is more than 23%. Since we are on the topic, here is another shrewd piece of personal finance advice: Cash advances are rarely a good idea (unless you are someone like Drake).
Not to sound malevolent, but I am bullish on Visa, Mastercard, and American Express long-term based on the premise that countless individuals will make minimum payments without fully grasping the fact that they are shelling out 15%-20% in interest.
Furthermore, although millennials have transitioned away from cash, there is a subset of the population that have yet to fully embrace plastic as their sole payment method. However, that is an article for another day and I digress.
Similar to running on a hamster wheel, making minimum credit card payments does not get you very far.
The following inputs are assumed for the example illustrated below:
- $2,000 intial balance
- 15% APR
- 3% minimum payment ($60/month)
The cardholder in this example will fork over a total of $1,222 in interest payments on top of the initial $2,000 balance. Additionally, it will take roughly 10 years to completely eliminate the debt.
While this is somewhat of an extreme example, considering debtors would most likely increase their monthly payment if they had the available funds to do so, it highlights the dangers of consistently making minimum credit card payments.
Damaged Credit Score
Accumulating and carrying credit card debt adversely impacts the credit score of a cardholder. This three-digit number will follow an individual throughout their lifetime and cannot be reset. A credit rating indicates how trustworthy a cardholder is from the standpoint of a lender, whether it be a bank, credit company, or landlord.
While credit cards serve as a convenient way to establish personal credit, they can be extremely perilous if in the hands of an undisciplined cardholder, as noted above. In order to eschew any credit score blemishes, the statement balance must be paid off in full each month.
Building credit and maintaining a favorable score is absolutely paramount and should not be overlooked.
Bottom line — Avoid carrying credit card debt at all costs and thank me later.
Full Disclosure: Long V