First, just to share a piece of statistics.
Second, let’s put things into perspective. Usually, the credit card annual interest rate is around 20%. It only takes 4 years for the debt to double in size with this interest rate assuming only compound once a year. However, most credit card compounds daily per Experian, a credit bureau!
What is interest compounding? It means credit card company charge interest on top of interest. Let’s say I own $1000 dollars on my credit card. 20% annual interest rate is $200 per year. Next year, this $200 interest will bear interest too. 20% of $200 is $40.
Interest can compound daily, weekly, monthly, quarterly, etc. The more often it compounds, the bigger the absolute amount of interest. You can see more details here.
Some financial planners suggest stopping saving for retirement if someone has credit card debts. I agreed with her on that. Simple match comparison. Most retirement investment can’t get 20% annual return year over year. Many would be quite happy with 10% on average annual return in fact. S&P 500 index annual return is just below 10% on average in the past several decades. Most active managed fund can’t beat this which is the so-called “beat the market”. However, the credit card interest is guaranteed around 20% every year.
Therefore, it is a no-brainer to prioritize paying off credit card debt over saving for retirements.
I just hope that we all have this option. If we don’t, we have to either cut living expenses or take another job.
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