Getting motivated to pay off credit card debt can be a challenge knowing that you only need to make a minimum payment to get by but let’s help put things into perspective. Did you know that consumers can pay off a 30-year mortgage faster than their $5,525 in credit card debt when making only the minimum payments? It’s true - we’ve done the math.
According to Experian, the average balance on consumer credit cards in 2021 was $5,525 and 40.7% of those consumers carry a balance on their cards from month to month. At a quick glance, these numbers don’t seem so bad. In fact, the percentage of consumers who carry over balances each month is at an all-time low. Unfortunately, the truly concerning part is how much these people will pay for this debt without thinking twice about the real cost.
Here’s a riddle, what do the numbers 443, 37, and 10,380 have in common? It will be the approximate 443 months, 37 years, and $10,380 in interest each consumer will pay for their $5,525 in credit card debt. Did you just think how is that even possible? Are they really paying double their principal balance in interest? Let’s take a look at some of the math.
According to the Federal Reserve, the average credit card annual percentage rate (APR) in 2021 was approximately 16%. Most credit card companies require 1%-3% of your principal balance paid down each month plus interest charges - we’ll use 2%. Let’s assume consumers only make the minimum payment and don’t add any additional debt.
To get the daily interest rate, use the APR and divide it by 365 (for the days in a year). Take that figure and multiply it by the current balance to get the daily periodic rate.
(APR / days in year) * current balance = daily periodic rate
(0.16 / 365) * 5,525 = $2.42 daily interest
You can calculate the monthly payment by multiplying the daily periodic rate and the number of days in the billing cycle.
daily periodic rate * number of days in billing cycle = monthly payment
$0.24 * 31 = $75.08
Repeat these steps 442 times to get your total interest paid or use this super easy (and free) online calculator that even provides you with a payment schedule.
Now, if these figures don’t motivate you to pay off your credit cards every month, I always recommend looking at the amount of time it takes you to earn that money. If you make $15/hour, it will take you 692 hours to pay only the interest owed on your credit card. Get help to create better habits and book your appointment with KJ Dykema, MRFC® today to pave your path to financial freedom.
Johnson, A. (2021, September 10). The average credit card balance is $5,525. here's what you need to know. CreditCards.com. Retrieved January 2, 2022, from https://www.creditcards.com/credit-card-news/credit-card-debt-statistics-1276/