Is it True? Credit Cards are Bad Math?

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A lot of people like to knock the Dave Ramsey plan, saying Dave Ramsey is bad at math with his debt snowball, which teaches to pay off the smallest debt balance first regardless of interest rates.

Dave Ramsey’s favorite response to this criticism is, “Honey, if we were concerned about the math we wouldn’t have credit cards, to begin with!”  And he is right.

Let’s take a look at the whole credit card racket. According to creditcards.com here are the average interest rates charged:

average credit card interest rates

  • Low Interest 11.41%
  • Balance Transfer 11.41%
  • For Bad Credit 12.81%
  • Cash Back 13.13%
  • Reward 13.66%
  • Business 13.95%
  • Instant Approval 14.18%
  • Airline 15.08%
  • Student 17.88%

Hmmm…am I the only one who notices the credit card industry’s current primary target -college students- is also the one they earn the most interest off of? Or that all these “brownie point” type of cards also have higher interest rates? Especially small business owners should be careful.

Remember these are all just averages…which means while there are better interest rates there are also much worse! So let’s work off the average of these averages, which is 13.73% (Technically, it is 13.723333….. but since credit card companies will always round up partial pennies I will also)

Current standard savings accounts are paying very little right now…I think my credit union is at 1% this month. Mutual fund money market accounts are doing a little better at about 3-4%. This is what you can earn for your money. And if you’re still in college, I would rather worry about improving my GPA than what credit card would be right for me.

Many people who see nothing wrong with getting and using a credit card also have money in savings. Let’s think about this little trivia for just a second…people have money earning them from 1-5% interest then turn around and pay 13.73% interest! That’s an 8-12.73% LOSS on their money, not including inflation. Shouldn’t we all learn from mistakes made in the past just like some online promotions went so terribly wrong in the past?

And inflation comes into play when you consider how many consumers carry a balance on those credit cards, and for how long. My parent taught me this already before graduation day so I was warned! The minimum payment for a credit card is 2% of the balance or $20 (sometimes as low as $10), whichever is less. That means it can literally take YEARS to pay off a credit card balance of only $2000 (that we USED to have with American Express!).

When we were carrying a balance on AmEx very close to $2000, the minimum payment they required was $35 and the finance charge each month was over $20…meaning less than half of that minimum payment was actually going to the balance.

For each step forward, we took half a step back. For a year of payments, we would only make a $180 dent into that principal balance. Wow, is that really worth it? Do I really want to owe my soul to a credit card company for that long  Is there anything that I actually NEED that is worth paying 13.73% interest on in my life? All these credit card companies seem to be working together as teams with just one goal: Your Hard-Earned Dollars!

Those of y’all who have credit cards: I challenge you to actually read your next statement. Compare the minimum payment to the monthly finance charge…then flip it over and search the terms and conditions for something about “universal default” and late fees, and over the limit fees, and penalty interest rates, just to see how much you have to really pay for that little flat rectangle of plastic. Have a little confidence in your math skills and discover just how much…per month… per year…are you REALLY paying?