Your Best 2020 Investment May Have Nothing to do With Stocks
Paying down credit card debt delivers a double-digit, guaranteed return
It’s not just 401(k) and IRA balances that have been on the rise during the 10-plus years since the Great Recession. The Federal Reserve Bank of New York says that late in 2019, we collectively had an all-time high of $880 billion in unpaid credit card bills.
That’s making banks rich. The average interest rate paid by households is nearly 17%.
You don’t need a reminder that paying high interest on any debt is never smart, but if you’re still rummaging around for a financial goal for 2020, reducing credit card debt deserves top consideration.
Could the good times in the stock market continue? Sure. But no one should be surprised if, at current levels, stocks fall or mark time in 2020. Which makes paying down debt even more compelling. If you have credit card debt, plug the interest rate you pay into this thought:
“I would be interested in a guaranteed return of X% this year.”
That’s what you can give yourself if you pay down/pay off your credit card debt. Say that you have $5,000 in card debt and pay 17% interest. Let’s assume your minimum payment is 2% of the balance and that’s all you pay. If you didn’t run up any new debt, by the time the debt is paid off (34 years), you will have paid nearly $11,000 in interest.
Card issuers love to suck you into paying interest for decades. In our example, the first payment is $100, but the next month’s minimum payment will be slightly lower as your 2% minimum will be on a lower balance. At a flat 2% of your balance, it takes more than three decades to pay off a $5,000 balance costing 17% interest.
Practical ways to get out of debt faster:
Stick with the first payment amount each and every month. In our example, you will owe $100 the first month. If you keep paying $100 a month (and not the lower minimum that will show up on subsequent statements) you will be out of debt in eight years and your total interest costs will be about $3,800
Double down on higher payments. What the credit card issuers don’t want you to realize is how easy – yes, easy – it can be to get out of debt. Using our same example, if instead of $100 a month you pay $200 a month, you will wipe out your debt in less than three years and in the process will have paid about $1,200 in interest.
Not feeling like doubling your payment is doable? You sure? It is the rare household that can’t rethink some of their spending to free up an extra $100, $200 or more a month. The potential sources of saving: Switch to a less expensive used car with a lower monthly payment. Drive the car for at least five to seven years after you pay off the loan.
Spend less. Eat out less often. Review recurring monthly/annual subscriptions that are on auto-renewal. Avoid impulse grocery buys by shopping with a list, and try the 24-hour wait rule with online purchases: Leave it in your cart for a day and see if you still feel the need to buy it. Review your credit card statements with an eye for recurring payments. Businesses pray that we won’t notice the payments, or that our inertia will keep us from asking ourselves, “Hey, do we really need this?”
In line for a tax refund? The average last year was more than $2,500. That would make a powerful dent in your credit card bill.
If you anticipate you will need more than a year to get out of debt, you might want to consider a balance transfer to a credit card that will not charge you interest for an introductory period. You typically need a high FICO credit score of at least 740 or so to qualify for a “zero rate” deal. (Search online for “best balance transfer deals.”) And there is typically a transfer fee of 3% to 4% of the balance. But if you can land a deal where you can move your existing balance to a card that charges you no interest for 12, 15 or even 18 months, that’s a lot of time to hustle to pay down a balance where you aren’t being charged more interest.
Break the habit. There’s one big catch to all of this. Paying off credit card debt only pays off if you also vow to not run up more charges. Any chance you’re suffering from expensive lifestyle creep?
If your credit card debt is the result of being blindsided by an unexpected expense (health insurance co-pay, a big car repair, etc.) your first goal after you dig out of your current card debt should be to boost your emergency savings. Sure, you’ve intended to do that for years. But now it becomes more feasible. Take the money you’re no longer shelling out to pay off high-rate debt, and build up a savings account that will provide some protection from ever needing to fall into card debt again.