Seventy percent of credit card debt accrues interest

“Did I just read that right?” I thought as I put down my coffee and twice re-read this paragraph:

‘Consumers are still cautious about the debt they build up on credit cards. An analysis by card operator Mastercard shows that only 70.8 per cent of the total $46.9bn in credit card debt is accruing interest, which is the lowest level in a year.’

Shoppers splash out $21bn on their credit cards” by David Uren, The Weekend Australian, February 13-14, 2010″

Over seventy percent of credit card debt is accruing interest. That’s outrageous! I hope that is a large amount of debt held by a small percentage of card holders – but I already know I hope in vain. Other research shows that around fifty percent of credit card holders regularly pay interest on their credit cards.

The first, most important rule of getting rich

It’s outrageous that in 2010 this is the case when the basic rule of personal financial management (and wealth creation) is to spend less than you earn. Such credit card statistics just reinforce the fact that as a society we are terrible at this basic rule and so we can only point the finger inward when we are dissatisfied with our financial achievements

But that is not what made me double-back over the paragraph. What astounded me was that the journalist Mr Uren described that high percentage as consumers being cautious about the debt built up on their credit cards.

Repay debt before building cash savings

On Wednesday I was again asked a question I am commonly asked by people with large credit cards debts, “should I use my cash savings to repay part of my credit card?”

Absolutely! Mathematically it is a no-brainer.

You earn less interest on your cash savings than the interest you pay on the credit card debt. So you are further ahead by actually having less cash and less debt.

After giving that advice the next thing I sometimes hear is “oh yeah but that cash is savings for a…[big holiday]”.

You’re joking right? Don’t even think about splashing out and probably getting into more debt while you’ve got this big anchor of credit card debt accruing interest. You’ll never get rich that way, let alone have enough money for what’s really important. (In the flesh I am much more diplomatic, honest.)

What do you think?

  • Am I over-reacting to be outraged and astounded by this newspaper paragraph and credit card statistic?
  • Is my suggestion about savings vs credit card to simplistic to be realistic? What makes you struggle to implement it? (share it below and I’ll reply with some suggestions.)
  • Are we perhaps not socially and behaviouraly mature enough to handle credit cards? Are they legal weapons of mass financial destruction?

Please share your opinions in the comment section below. I read them all and respond as often as I can.

Author: Matt Hern

Certified Financial Planner professional, Matt Hern has three times been awarded as one of Australia's Top 50 Financial Planners by The Australian Financial Review Smart Investor. He is passionate about guiding you on the right financial choices to achieve what you really want. Matt Hern is an Authorised Representative of Charter Financial Planning Limited AFSL 234665. All information is general advice only.

1 thought on “Seventy percent of credit card debt accrues interest”

  1. 1. I don’t think you are over reacting, I think it just really emotionally effects you because you are so connected to financial planning and the right way to build wealth.

    2. I think the struggle here is to first get that cash together and then use it to repay the debt. The free cashflow is hard to get because monthly expenses, taxes, insurance, electricity, phones and food all add up and its a death by a million cuts on the monthly salary. Perhaps a dedicated sum of that needs to be taken out first to repay the credit cards each month before some of the miscellaneous spending is accidently made.

    3. I think credit cards can be great if you can handle them. On the other hand if you do have financial difficulties they can be a great way of short term managing personal finances. E.g. if you lose your job you can negotiate better when you have spare cash on your card and therefore get a better package.

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