Paying off Credit Card Debt - A GREAT return on investment

Written by A Guest Speaker on May 21st, 2008

Paying off Credit Card Debt - A GREAT return on investment
Written by Chris Old

Credit Card Debt is a nasty subject to many people. I often see people who are loaded with Credit Card Debt, yet spending money on “investments” or 401k plans that there employers do not contribute to. Whenever I see someone investing in anything while they still have credit card debt, it makes me wonder why they don’t invest the money into there debt.

Most credit cards have an interest rate of between 7% and 36%, depending on your credit. If you have a lot of debt most of the time it will be higher. What people do not realize while they sink there money into other investments is that they can get an instant 7% to 36% on there money just by paying off there credit cards. Any investor will know that a guaranteed 7% to 36% return on your investment is an opportunity that you should sink as much money as you can in. So instead of putting money into a 401k, stocks, savings accounts or whatever else, you can gain a guaranteed return on your money just by paying off your credit card debt, and not being charged that same money further down the road.

Here is a good example, our friend Bill has $1000 in his savings account gaining 3% interest, he is contributing $100 a pay check to his non matching conservative 401K gaining 7% interest and he is paying an extra $50 to pay down his car loan which is at a low 2% interest, all the while he is only making the minimum payment on his $3000 credit card debt which is charging him %25 interest. Bill thinks he is doing good because he is paying extra money towards his car payment to pay it off quicker, and he is saving money in both his 401k and his savings account. Bill thinks he is making money, but in reality if he where to take all of his savings, stop contributing to his 401k and stop over paying his car loan, he would get a much greater return on his money by paying off his credit card debt as quickly as possible and net himself a 25% return on investment. This would eventually allow our friend Bill to contribute much more to both his savings account and 401k, while making them minimum payment on his low interest car loan.

The bottom line is that we have to look at the interest rates of not only what we are making money on, but also the interest rates of what we are paying money on. If we are paying high interest rates on credit card debt, it completely cancels out the interest rates of our investments and we simply continue to lose money each and every month on our bottom line. Why make the Credit Card Companies rich when we could make a little interest ourselves!

It seems that everyone loves borrowing money to pay for things. There are even gimmicks to make people think they are saving money or getting things for free by using there credit cards, but someone has to pay for all of those frequent flyer miles, and if you have credit card debt then I should thank you for my flight to Hawaii! Credit Card Debt is nothing but paying someone to borrow there money. If you have the money to invest elsewhere, why not invest it in yourself and get to the point where you are not paying someone else to borrow there money.