March 17, 2010

The Lasting Impact of Credit Card Interest

Back when I was first in college I got my first credit cards and quickly started to pile up some debt.   I don't have good records from that period and I don't remember exactly how much debt I had but I'm pretty sure it was in the ball park of $10,000 or less.

Lets work with the theory that I had a maximum of $10,000 in credit card debts at the peak.   I carried credit card debts gradually built up over a 8-9 year period.   I could very easily have paid something like $10,000 in interest for that debt in those 9 years.   If I started at $0 and ramped up to $10,000 over 9 years then 20% interest would come out around $10,000 roughly.   So on $10,000 of spending I likely paid around $10,000 in interest to credit card companies.

I paid off those credit cards around 12-13 years ago. That was about the time that I bought my first car with a loan.  Before then I'd driven clunkers that my parents gave or lent to me.   I paid about $7500 for my car and financed it.  If I hadn't paid the interest on my credit cards I'd have had about $10,000 in the bank and I could have bought that car with cash instead of getting a loan.   My car loan was about 7%.   I paid the car off after a couple years but not before paying around $1,000 in interest on it.    So that earlier credit card debt indirectly cost me another $1,000 in interest payments for my car loan.

A year or two after I paid off my first car I then bought my home.   I bought the home with a 3% down payment (yeah I know thats not a good idea but hindsight is 20/20).    If I hadn't paid the interest on the credit cards and the interest on the car loan I'd have had about $11,000 extra in cash that I could have put into the home loan.  My initial home loan was about 7%.   I paid on that for a couple years then refinanced down to 6%.  After another year I refinanced again to 4.75%.   If I had put that $11,000 into the home downpayment then I'd have saved myself about $4,800 in interest (after tax deductions) over the past 10-11 years.

Originally I paid around $10,000 in interest directly on the credit card debt.    If I had never taken on the credit card debts in the first place I would have been about $10,000 ahead around 12 years ago.   I then bought a car and paid about $1,000 interest on the car.   If I had had that $10,000 in cash I could have avoided that $1,000 in interest on my car loan.   I would then have been about $11,000 ahead around 10-11 years ago.   If I had that $11,000 in cash at that point I could have put it into my home loan and I would have avoided about $4,800 in interest on my home mortgage in the past 11 years.   That would put me about $15,800 ahead over all.    This chain reaction has caused my initial $10,000 of credit card purchases to cost me $15,800 so far over all.

Of course you can play this game a variety of ways.   If I had not paid off those credit cards and just kept making minimum payments I'd have paid over $28,000 in interest on it and I'd still have over $6,000 on the cards left to pay off.   

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