How Much Is Credit Card Debt Really Costing You? (Plus 3 Things Your Credit Score Hates)

Credit card debt isn't just a problem for people who are struggling to make ends meet. According to lender BHG Financial, as reported by Yahoo Finance, 62% of people earning more than $300,000 a year carry a credit card balance.

I'm not surprised in the slightest when I see a revolving balance of $20,000 or $40,000. It usually didn't happen all at once. It just became the new normal over time.

How much does credit card debt cost you each year?

For every $10,000 of revolving credit card debt at a 20% interest rate, you're paying the credit card company roughly $2,000 a year. A $20,000 balance costs about $4,000 a year. A $40,000 balance costs about $8,000.

And unlike mortgage interest, you don't get a tax deduction for it. Interest on personal credit card debt isn't deductible.

Even if the bills are getting paid on time, I bet you want that money back. Paying off a $20,000 balance responsibly puts around $4,000 a year back in your pocket, every year.

Why do high earners end up with credit card debt?

Usually, it's not one big purchase. It's lifestyle creep. As income grows, spending grows right along with it: a bigger house, nicer cars, more travel. Add in a few unexpected expenses like a medical bill or a home repair, and a balance that was supposed to be temporary starts rolling over month after month.

How to pay off credit card debt

There's no single right answer, but most good payoff plans include a few of the same pieces:

Stop the balance from growing. Look at where the new charges are coming from and adjust your spending so you're not adding to it each month.

Pick a payoff order. The avalanche method pays off the highest-interest balance first and saves the most in interest. The snowball method pays off the smallest balance first for quicker wins. Either works if you stick with it.

Look at lowering your rate. A 0% balance transfer or a lower-rate consolidation loan can cut your interest costs, as long as you have a plan to pay it off and don't run the cards back up.

Build an emergency fund. Having cash set aside keeps the next surprise expense from landing on a credit card.

What hurts your credit score the most?

Since we're talking about credit cards, here are three things your credit score really doesn't like. Together, they make up 80% of your FICO score.

Late payments (35% of your score)

Payment history is the biggest factor in your FICO score. A late payment does the most damage in the first couple of years, and it will generally stay on your credit report for seven years. Setting up autopay for at least the minimum payment is one of the easiest ways to protect your score.

High credit utilization (30% of your score)

Credit utilization is the percentage of your available credit that you're using. Keeping it under 30% is the commonly "recommended" target, but I recommend 0% to 1%. Your card issuer usually reports the balance on your statement, so paying your card down before the statement closes can keep your reported utilization low, even if you use the card regularly.

A short credit history (15% of your score)

The length of your credit history matters too. That's why I still pay $4 a month to keep my first credit card account open, and why I avoid opening new accounts like the plague. Keeping older accounts open protects both the age of your credit history and the total credit available to you.

The other 20% of your FICO score comes from new credit (10%) and your mix of credit types (10%).

The takeaway

Credit card debt has a way of becoming normal, but it's one of the most expensive habits you can have. Pay it down, keep your utilization low, protect your payment history, and that interest money stays yours. Happy saving, my friend.