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The Real Cost of Using Credit Cards – Other Than Interest Rates, APR & Annual Fees

For many people, credit card debt becomes just another burden they feel they have to bear. They become complacent, continuing to carry balances throughout their working lives, and into retirement.

How do you get to the point where credit card debt is just a fact of life? One answer to this question lies in the bills themselves.

When carrying debt, most people look at the obvious numbers to determine what they’re paying to maintain them. The basic arithmetic of interest rates and annual fees can lull you into a false sense of security. If you never look beyond these numbers, you never have to face the true impact your debt is having on your life.

Unfortunately, there’s much more to the cost of carrying credit card balances than meets the eye. Here are five ways that your credit card debt is holding you back.

1. True Interest Costs

The interest charge you’re paying to maintain your credit cards actually understates the real cost. Finding the true cost means figuring out how much income you must earn in order to pay the annual interest expense on your credit card debt.

To get the answer, you need to take a good look at your pay stub.

Income Taxes and Payroll Deductions
Say you have a $10,000 credit card balance with an average 10% rate of interest. Your direct interest expense is $1,000 per year, so you’d have to earn that much to pay it, right? Wrong!

Let’s do the math. In order to drive the point home, I’ve come up with some basic estimates for the equation for a typical citizen’s income: 28% Federal Tax + 6% State Tax + 7.65% FICA tax = 41.65%

That’s a combined income tax rate of about 42%!

But wait…we’re not done yet. Let’s say you also have 10% of your pay put into your company’s individual 401k retirement plan. That’s 10% plus 42% for income taxes, for a grand total of 52%.

This means that, in order to pay that $1,000 in credit card interest on top of everything listed above, you’d have to earn over $2,000 (pre-tax)! That’s a little more complicated, and a lot more expensive, than the 1:1 ratio you might assume.

2. Stress

woman closing her eyes

One of the unseen costs of carrying credit card debt is stress. Once credit cards become too numerous or you begin carrying outsized balances, concern develops over how you’ll pay them off.

When that stage is reached, stress can build into constant worry, loss of sleep, lower productivity, and a cluttered mind. All of these can combine to affect your health and hurt job performance, introducing a whole new set of problems.

3. Lack Of Options

Being weighed down with debt interferes with your ability to do the things you want in life, both personally and professionally. The following are a just few of the things you should take into consideration the next time you get a credit card offer:

  • Changing Jobs – Is there a great career field you are dying to get into? Would you love to be able to work less so you can spend time with your family? When debt takes over, career options are limited. You can get stuck in a job you hate simply because you can’t afford to take a pay cut.
  • Moving – Similarly, you may be unable to make a geographic move due to lack of funds and high moving costs. While you’re ringing up purchases, those credit card payments are shackling you to your current physical location.
  • Offering Assistance to Family – What happens if someone in your family is down on their luck, ill, or passes away? With all of your income tied up in monthly payments, you don’t have the ability to help. That can be a terrible feeling, especially if your family is living on one income.

All debt can contribute to these problems, but credit card debt is the biggest offender. Unlike car loans and mortgages, there’s no collateral securing the debt that can be sold to pay it off.

4. Reduction in Net Worth

an almost empty leather wallet

Most of us don’t think of credit card debt in terms of long term wealth building, because it’s considered a short term debt. We might rationalize by saying, “I’ll pay the credit card off by next month/next year,” or “I’ll have that paid off long before I retire (or make that next big move).”

Whether or not we acknowledge it, credit cards represent a reduction in our investment worth. A $50,000 investment plan accompanied by $20,000 in credit card debt means a net worth of $30,000. Add lifestyle inflation and, as our assets and income grow, so do our debts. There is a big difference between income vs. wealth.

5. Life Complication

It’s almost a basic human desire to live a simpler life, and most of us can easily appreciate the reasons why. Each component added to our lives brings its own set of complications, and credit cards are no exception.

Think of everything you have going on in your day to day life. Do you really want to have to tangle with credit card companies if there’s a dispute? For every credit card you have in use, the potential issues and complications multiply.

At the very least, a credit card balance means one more bill added to the stack you already have for the things in your life that are not optional, such as utilities and medical bills. You’re also more susceptible to credit card fraud and scams that are becoming more common.

Final Word

It is important to remember that, unlike many aspects of life, your financial situation is completely within your control. You have the power to make the choice not to sign up for that next credit card. If your ultimate long term financial goal is a simpler life with fewer bills and fewer entities to deal with, having credit cards won’t help make it happen.

Now that you have an idea what credit cards really cost, use it as motivation to get your finances under control and finally pay off debt for good.

Have you suffered through the emotional and financial costs of credit card debt? What motivated you to take control? Please share your story in the comments below!

With backgrounds in both accounting and the mortgage industry, Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, He lives in Atlanta with his wife and two teenage kids.