# Cost of Credit Card Debt Calculator

Credit card debt is terrible. To a financial planner, credit card debt is like having a cluster of thousands of baby spiders crawling on your body and under your clothes: You cannot act fast enough and there is no amount of modesty worth leaving the situation unresolved. Recently, I spoke with someone who did not pay off their credit card debt every month even though they easily could have. Their negligence was due solely to the effort it took to pay each month. What they did not realize was that when you fail to pay off your credit card each month, subsequent charges all begin accruing interest from the date of purchase. Assuming \$3,000 of purchases on their credit card each month, an annual interest rate was 18% meant they were mindlessly adding about \$540 to their annual spending simply because they were using a credit card that had a pending balance. An unpaid balance is even worse. An unpaid balance could cost the average family with credit card debt over \$2 million. Here’s how the math breaks down. If you assume:

\$9,333 Average Balance. This is a recent figure for households that carry a balance. One study found the average household carries a credit card debt of \$5,700, but only 38.1% carry any credit card debt at all. That would suggest that the average household that carries a debt owes about \$14,960. I’ve seen other studies from several years ago that suggested an average balance above \$7,000 or \$8,000. In my analysis I did not increase the average balance over time, although it appears that the average balance in the United States continues to rise. I assumed that the household pays any additional charge to the credit card every month plus all the interest. This is probably more optimistic than reality.

18% Average Credit Card Interest Rate. This seems like a conservative credit card rate. Credit cards are unsecured debt and can be lost to the lender on account of bankruptcy. As a result they charge a ridiculously high interest rate. I’ve read in various articles that the average interest rates on new cards is 16.71% or 17.21%, but these are for new cards not delinquent cards. Depending on the credit card company, they are allowed to raise your interest rate if you fail to pay your balance in full each month or don’t meet the minimum payment. This delinquent rate is often an annual percentage rate (APR) of 24%.

10.44% Missed Stock Market Returns. This has been the mean return of the S&P 500 Total Return Index since its inception on 12/31/1969 through 11/30/2018. You can easily argue that we should not expect those returns going forward, but you can’t argue that we haven’t experienced those returns looking backward. These are the historical returns for the past almost 50 years.

50 years. I am assuming that households that carry a credit card balance start young and never stop. This is a fairly safe assumption. One study from 2007 suggested that university students were graduating with an average credit card debt of about \$7,000. For my analysis I am assuming that the average household with credit card debt starts at age 20 and continues to age 70. One of the three financial lies that households in debt live by is “I will get my finances in order as soon as…” People think that they will get their finances in order later, but they do not. Credit card debt often ends in filing for bankruptcy. And after coming out of bankruptcy the cycle begins again.