A sudden emergency or a general rise in expenses may be a couple of reasons why people incur debt. Or, it could be from a nice vacation or general mismanagement of cash flow. In either case, credit card and other consumer debt is something that can’t be ignored and can have the most damaging impact on a person’s financial future.
Credit card debt is widely held in the U.S. Over 43% of Americans have held the same debt for more than 2 years and the total sum has reached $1 trillion, according to CNBC(^1). Junk lending, as it’s sometimes referred to, remains a hugely profitable business, earning $163 billion in 2016 (^2). The average interest charged is 16.7% and don’t forget about the late fees, annual fees, transfer fees, foreign transaction fees, and cash advance fees for up to 5%.
The true cost of having debt isn’t as much about the fees but rather from the lost opportunity of investing. $25,000 of credit card debt might have $9,626 of interest costs in 4 years at 17% APR, where if it were invested, you could be on the receiving end of that, with an ending balance of more than $34,000. (The S&P 500 earned 13.68%/year for the last 5 years.) However you decide to measure it, money invested can have an incalculable impact over the long-run.
Don’t wait to clean up a mess of consumer debt and know that you are not without options. Depending on the size and type of debt, you can try consolidating your cards into a single, zero interest card^3 or open a personal loan that comes with a payment plan. Check out bankrate.com/loans/debt-consolidation to see financing options.
More importantly, organize your cash flow to avoid these situations in the future. Ideally, you should have 3-6 months of expenses saved up as a cash reserve and keep your spending under the amount you earn.
At Eureka Wealth Management, I help my clients maintain a consistent cash flow and plan for emergencies and opportunities that come up when least expected. I also provide advice around using home equity as a means to cover "bad" debt. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.
^3 Note: there may be transfer fees