The True Cost of Credit Card Debt

Know the true cost before you charge something on your credit card. When you purchase a $50 shirt and pay for it with a credit card, does it really just cost $50? Using the Rule of 72, I am going to show you how a $50 shirt can turn into a $200 expense. 

The Rule of 72, which was developed in the 15th century, is an accounting shortcut to estimate how quickly money doubles. The calculation can be used for investment earnings or debt. The Rule states that if you divide 72 by an interest rate, you get the time it takes for the amount to double. 

Americans currently hold over $856 billion in credit card debt. This amount rose $52 billion just in the 4th quarter of 2021! The national average card debt among cardholders with unpaid balances is around $6,570. More than half of all active credit card accounts have a carry-over balance. 

The average credit card interest rate is around 16%. The rate is over 19% for new credit card offers. Let’s apply the Rule of 72 to a credit card balance and run some analytics. 

72 divided by 16 (the average interest rate for credit cards) is equal to 4.5 years. 72 / 16 = 4.5 years 

In 4.5 years the balance will double. 

This means that if you have a credit card balance of $5,000 and you only pay the minimum monthly payments on it, that $5,000 balance will grow to approximately $10,000 in just over 4 years. If the card continues to hold the balance, then in 4.5 more years, the balance doubles again. In 9 years the balance will be $20,000. 

In 4.5 years $5,000 becomes $10,000. 

Then the $10,000 balance doubles in another 4.5 years to $20,000. 

That’s crazy, hugh? Now you see why credit card companies are so profitable. And now you see how a $50 shirt charged on a credit card can double to $100 in 4.5 years, and in 9 years cost you $200. Is having the $50 shirt now really worth it? 

The best financial practice is to buy only what you can afford to pay now. It’s OK to use credit cards, you just have to be disciplined and pay them off every month. Never carry a balance. When you carry a credit card balance it means that you are spending more than you can afford. Don’t buy anything you don’t already have the money for. Buying on credit is very attractive and enticing, but it can get you into deep financial problems very, very quickly.