How To Cancel Credit Card Debt

Revealed – The Ugly Math Behind Credit Card Debt

February 25, 2013 by Paul Ritz

Compound interest can be an incredible power in terms of helping you create wealth over time. However, it has a downside when it comes to debt – especially credit card debt.

It’s only a vacation to Hawaii
If you want to see the ugly math behind your credit card debt, here’s an example. Let’s suppose you have an average balance of $5,000 and are paying an annual interest rate of 22% and that this compounds monthly for the next 10 years. If you’re employed, a balance of $5,000 is really not a really big deal. It’s the equivalent of a trip to Disneyland or a week’s vacation in Hawaii. So, you think, “Gee, how bad could that be?”.

It’s bad
Here’s the shocking answer. When you includ the monthly compounding, this will cost you $44,235 or about nine times what it would seem to cost. In other words, compound interest has changed that moderate credit card balance into a very expensive investment.
Here’s another example of the ugly math behind credit cards. If yours is an average household, you carry an average balance of $15,956 in credit card debt. And you’re probably paying an average current rate of 12.83%. If you were to carry this average balance for as long as 40 years, you would end up paying $2,629,618.

You may not have learned this in school
When you were in middle school, your math teacher may not have demonstrated the ugly math behind debt. But you can bet the credit card companies understand it. In fact, this ugly math is their entire business model.
These two examples of the math behind credit cards are a bit exaggerated. However, this should serve as a wake up call as to why it’s best to dump that credit card debt.

How to get out from under that load
If you’re carrying a big load of credit card debt, you might want to sit down and figure out how much it’s really costing you and the total amount of money you would pay to get out of debt in three or four years. Our guess is that that number would shock you. This is especially true if you have multiple credit cards with an average interest rate of 20% or higher.

”Snowball” those debts
One way to handle that ugly math is by “snowballing” your credit card debts. First, make a list of all your credit cards with their balances and interest rates. Next, order them based on their balances from highest to lowest. Double or even triple your payments to the card that has the highest balance. Once you’ve paid it off, you will have money you can now use to pay off the credit card that has the next highest balance. This has a “snowball” effect because the faster you pay off those cards with the highest balances, the faster you will get out of debt.

Transfer your balances
A second way to defeat that ugly credit card math is to transfer the balances on those high interest credit cards to one with a lower rate. If your credit cards have an average interest rate of 20%, you might be able to transfer all of them to a new card with an interest rate of 12% or less. There are now a number of low interest, no-frills, credit cards available and you might qualify for one of them.