The other day we published the article How Much Credit card Debt do Americans Have? where, according to data released by Consumer Federation of America, the average American Household has $8,500 on credit card debt.
We love numbers, and we started wondering how long will it take the average American Household to pay off their average credit card debt, so we fired up our spreadsheet and we started calculating.
Obviously we had to make a few assumptions. This is what we used:
- For interest rate we used 11%, which is an average rate for a low interest credit cards.
- We assumed that this typical average American family would not accumulate any additional debt.
- We also assumed that this typical average American family would not charge any additional purchases on the existing credit cards. As you know we advocate that you keep one credit card for every day purchases and that you pay off the balance each month, therefore incurring in no additional debt, no interest charges, and you get the benefits and protections of using a credit card for your purchases.
- We assumed that the monthly payment is 1/50th of the balance or $ 10, whichever is higher.
- Lastly we assumed that this typical American family will continue to make the minimum payment indicated in each statement.
The answer is shocking! At that rate:
- It would take 27 years and 4 months to pay off the $ 8.500 debt.
- It will cost a grand total of $15,441.14 in total monthly payments.
- This family will be enriching the pockets of their credit card company by a whopping $6,941.14 in interest.
And this family is lucky, they have good credit and they qualify for a low interest credit card.
Families with bad credit have to deal with 18% and more on their credit card debt, but let’s take 18%, in which case:
- It would take 54 years and 11 months to pay off the $8,500 debt.
- It will cost a grand total of $32,487.76 in total monthly payments.
- This family will be enriching the pockets of their credit card company by a whopping $24,309.88 in interest. Remember, it started as a $8,500 debt.
Shocking, isn’t it? It’s the power of compounded interest, which was the one thing that puzzled and fascinated Albert Einstein.
Without trying to be Einstein, let’s see what happens to the same family once they make the commitment to eliminate debt, leveraging an easy and simple first step: keeping the same monthly payment constant, without decreasing it for any reason. As the outstanding balances at their credit cards decrease, they continue to send the same amount each and every month.
In the case of the interest rate at 11% that family will:
- Pay off their credit cards in 5 years and 7 months (instead of 27 years and 4 months).
- It will cost $11,422.46 in total monthly payments (instead of 15,441.14).
- They will paying only $2,922.46 in interest, saving $4,018.68.
What if they have bad credit but they adopt the same strategy and continue to send the same monthly payments regardless of the minimum payment indicated in their statements?
In this scenario the family will:
- Pay off their credit cards in 7 years and 11 months (instead of 54 years and 11 months).
- It will cost them $15,829.00 in total monthly payments (instead of 32,487.76).
- They will paying only $7,329.00 in interest, saving $16,980.88.
We believe that used correctly credit cards are great tools for personal finances; credit cards offer convenience, protection, perks, and rewards including cash back. But at times credit cards can become a burden; if that’s your situation, we suggest you rid of your personal debt as fast as you can. It could take as little as one year, if you take the plunge; but if that’s too radical for you, take a look at your total monthly payments for this month, and continue sending the same amount every month, as you can see from the numbers above it can make a huge difference.
You can find additional tactics to accelerate your repayment schedule in the following articles:
- The fastest way to pay down your credit card debt: the one year plunge.
- How Many Credit Cards? And How to Reduce Credit Card Debt.