The national debt makes headlines frequently. What we don’t hear as much about is individual debt and the impact it has on financial security.
The truth is, debt prevents tens of millions of Americans from achieving their financial goals. Nearly 40 percent of people in the U.S. carry credit card debt from month to month.1 And their average balance is over $8,000.2
Of course, not all debt is bad. A home mortgage, for example, helps build long-term equity and even offers tax advantages. Revolving credit card debt, on the other hand, leads to the opposite of financial progress. Monthly interest compounds quickly, putting the payer deeper and deeper in debt.
Take a look at this table:
The total interest paid is staggering. By payoff, you’d pay more than double your initial balance. But there’s another cost involved in revolving credit card debt. That’s the lost opportunity to do other things with that money, like invest it.
Let’s look at how that money could potentially grow if it was invested instead of spent on credit card interest. We’ll use a conservative 5 percent average annual return:
Calculated using a hypothetical 5% average annual return, compounded monthly. For illustration purposes only. Does not reflect the performance of any Principal product.
If you’re ready to pay off your debt, it is generally recommended to start with the debt that has the highest interest rate first (while staying current on your other obligations, of course). Pay as much as you can on the principal until it’s paid off. Then use the money you were paying on that debt to tackle the next one. If you need help creating a plan, contact your financial professional.
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1 The 2012 Consumer Financial Literacy Survey, prepared for The National Foundation for Credit Counseling and the Network Branded Prepaid Card Association.
2 Experian analysis of March 2013 credit files.
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