Credit Cards

What Is The Cost Of Using Credit

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 5 minute read

Many people feel trapped by the weight of their credit card debt. They grow blasé about paying off their debt, so they keep carrying it with them even after they’ve retired.

How does one reach a place in life when credit card debt is accepted as normal? There may be clues in the bills themselves.

When calculating the costs of debt, most individuals only glance at the most glaring figures. Calculating interest and yearly fees on paper might give you a false feeling of security. If you don’t go further into the data, you won’t have to deal with the full extent of the damage that your debt is causing.

The true expense of carrying a debt on a credit card goes much beyond the interest and fees you’ll pay. We’ve compiled five instances in which your credit card debt is preventing you from achieving your goals.

True Interest Rates

The interest you’re paying on your credit cards is probably an underestimate of how much it will cost you overall to carry them. Calculating the amount of money you need to make each year to cover your credit card debt’s interest rate is one way to get closer to the real cost of the loan. Examining your most recent pay stub should yield the necessary information.

Payroll Deductions and Income Taxes

Let’s pretend you owe $10,000 on your credit card at a rate of interest of 10% on average. If you have an annual direct interest charge of $1,000, then you must earn at least that much each year. Wrong!

The math needs to be done. To emphasize my argument, I have developed some rough calculations of the formula for the average citizen’s income: To calculate, add the federal (28% tax), state (6% tax), and FICA (7.65% tax) rates.

Together, such taxes amount to around 42% of one’s salary. But hang on, not that’s the end of it. Let’s imagine that in addition to the above, your firm contributes 10% of your salary to a 401(k) plan for you. That’s a total of 42% due to income taxes, plus 10% in government spending.

In other words, you’d need to make more than $2,000 (before taxes) to be able to afford that $1,000 in credit card interest on top of everything else. That is not as simple or cheap as the 1:1 ratio may lead you to believe.


Stress is one of the hidden costs of credit card debt. When you have too many credit cards or start carrying a large sum on each one, you may start to feel anxious about being able to repay the debt.

If left unchecked, stress may lead to a state of persistent anxiety, disrupted sleep, diminished output, and mental chaos. When used together, these factors might have a negative impact on your health and productivity at work.

Lack Of Options

Being burdened by debt limits your freedom to pursue your personal and professional goals. When you next receive a credit card offer, keep in mind some of the following details:

  • Is there a specific profession you’ve always wanted to enter? Would you like to have more time off to spend with your loved ones? The dominance of debt over one’s finances can severely restrict one’s professional prospects. Because of financial constraints, some people are forced to stay in jobs they despise.
  • In a similar vein, you would not be able to change locations because of a lack of money or because of excessively expensive moving charges. Credit card transactions lock you within one specific spot until you’ve finished shopping.
  • What would you do if a member of your family fell on hard times, became sick, or passed away? With all of your funds going toward your regular bills, you just can’t contribute anything at this time. This might be especially distressing if you are supporting a family on a single income.

Credit card debt is the most common cause of these issues, although any form of debt can play a role. There is no tangible asset that can be used as security to get rid of the debt, as with a vehicle loan or a mortgage.

Reduction in Net Worth

Credit card debt is typically seen as a short-term obligation, rather than a means to develop long-term wealth. It’s common to tell ourselves things like, “I’ll pay off the credit card by next month/next year” or “I’ll have it paid off long before I retire (or make that next big move).”

Credit cards, whether or not we use them, reduce the value of our investments. Net worth is $30,000 if one has a $20,000 credit card balance and an investment plan of $50,000. Our assets and income are growing, but so are our debts because of the cost of living. The gap between income and wealth is wide.

Life Complication

It’s almost innate to want to simplify one’s life, and the motivations for this desire are obvious to just about everyone. Credit cards, like any new addition to our life, come with their fair share of hassles.

Take into account the many responsibilities you have on a daily basis. If there’s a disagreement, do you want to deal with the credit card company? The probability of having problems and complications increases with the number of credit cards you use.

A credit card balance is, at the absolute least, an additional payment on top of the ones you already have to pay for necessities like rent, food, and transportation. Credit card theft and scams are on the rise, leaving you even more vulnerable.

Bottom Line

Remember that your financial condition is entirely under your control, unlike many other elements of life. You are in control of your financial future and can decide not to apply for a new credit card if you so want. Avoid getting credit cards if your long-term financial objective is to simplify your life by reducing the number of people and organizations you have to deal with.

Now that you have a better understanding of your credit card expenses, you can use this knowledge as an incentive to get your finances in order and eliminate your debt once and for all.

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