We want to help families become debt-free. Today, over half (53%) of all open credit cards in America carry a balance each month and the average household has about $6,500 of credit card debt. Add in interest rates as high as 20%+ and this can become a big monthly expense for many individuals and families. Not being able to make payments in full and carrying a balance can add up fast.
Of course, life happens and so for a lot of families, credit card debt is inevitable, but when prioritizing your goals, paying off your credit card(s) is one of the first steps to a positive financial future (after building up a $1,000 for emergency savings and getting your 401(k) match). In this Money Hacks video, Alex talks more about our balanced approach to how to tackle credit card debt.
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Video Transcript:
Hey, it's Alex Assaley, and it's episode 95 of Money Hacks. We're getting so close to 100. I don't know. I can't remember how long we've been doing these, but I'm shocked that we kept it up for nearly a hundred videos about the top priorities goals, and challenges people face when it comes to their financial picture and their money.
We're in the middle of 2022, as we've talked about in prior videos a lot of living expenses are going up with high rates of inflation. That means that your take-home pay is not stretching as far. Some people may be accruing or building up credit card expenses or credit card debt, and so a question we wanted to tackle today is how bad is it if I'm not paying off my credit card every month? So, you know, ultimately we've created our Hierarchy of Financial Needs, a laddered approach to helping you think about your overall financial picture today and the top priority or next step you should consider to improve your financial life, to build financial security in the future and paying down, paying off your credit cards is one of the first steps right after building up a thousand dollars for emergency savings, ensuring you have enough money put away for medical expenses if you have an HSA and getting your 401(k) match.
So, it's a really important metric. That hierarchy while great is not the end all be all for some people paying down and paying off credit cards could be a top priority. If you're not paying off your credit card every month, you know, the amount of balance you're maintaining is getting charged interest. Credit cards carry some of the highest interest rates in any type of installment debt you could have. The average credit card interest rate today hovers right around 20%.
It's pretty common for people to pay somewhere around 17% to even 24% in credit card interest rates. Even if you have really good or great credit. So, you know, maintaining any balance on your credit card is just gonna add to this interest you're paying on that debt and really erode some of your annual cash flow and, and your financial savings. Certainly not the end of the world. I mean, there are, you know, there's a, a, a number of scenarios to consider like the interest rate, other financial priorities that you have. I can't say unequivocally that you gotta pay off your credit card as step number one, but it's definitely something that we would prioritize.
Also, one of the things that I see often that I would typically provide guidance against is that if you have a lot of cash set aside in emergency savings or other types of savings accounts, but you're also carrying credit card debt, it doesn't really make sense to keep that money in a savings account or a CD at a credit union or a financial institution where you might be earning 1%, 2% or so when you're paying 18%, 19%, 20% and interest on your credit card debts.
If you have extra money set aside and you're carrying a credit card balance, it probably makes sense to look at that really closely in the terms. If you can take some of your emergency or your excess savings and use it to pay down or pay off a credit card, if you're in a situation where you don't have emergency savings built up just yet, and you have credit card debt, I think it's about a balanced approach to really think about your monthly cash flow. Redesign your spending plan, your cash flow plan to try to create some excess savings every month and use that to build up, you know, that thousand dollars in emergency savings, and then take every extra dollar to pay down and pay off the credit card debt.
You can learn more on our website MoneyNav.com or from these types of videos. Keep your questions coming, and if there's anything we can do to help, please feel free to reach out. Thanks!