What's So Bad About Credit Card Debt?
By Motley Fool Staff
Is credit card debt really such a big problem? Unfortunately, it is. Americans owe more than
half a trillion dollars in credit card debt. In 2004, Senator Akaka of Hawaii introduced the
"Credit Card Minimum Payment Warning Act," saying: "Revolving debt, mostly comprised of
credit card debt, has more than doubled from $313 billion in January 1994 to $753 billion in
January 2004. A U.S. Public Interest Research Group and Consumer Federation of America
analysis of Federal Reserve data indicates that the average household with debt carries
approximately $10,000 to $12,000 in total revolving debt and has nine credit cards."
Once you've fallen prey to the easy-money attraction of credit cards, it's very hard to dig
yourself out. It can be tempting to simply ignore your balance and pay the minimum
requirement on your card. This is a dangerous approach, though. Let's consider an example.
Morris owes $5,000 on his Zirconium MegaCharge card, which extracts 16% in interest each
year. If he manages to scrape together enough money to pay it all off in a year, he'll be
forking over about $450 per month and will pay more than $400 in interest. In contrast, if
he takes his time paying it off and does so over 10 years, he'll be paying roughly $84 per
month and will end up paying a whopping $5,080 in interest. This means he will have paid
more in interest than he originally borrowed!
Building up credit card debt is kind of like investing -- in reverse. With investing, your
money grows. Mired in plastic, it shrinks. Think back to Morris and that $84 per month he
paid on his debt for 10 years. If he'd been parking it regularly in the stock market and
earned an annual average return of 11%, he'd end up with more than $23,000 after 10
years. (And if he'd invested it in the stock of a company like Wal-Mart or PepsiCo, he
might have more than $30,000 or $40,0