How Credit Card Debt Is Ruining Your Retirement

Photo (cc) by Andres Rueda

If you’re like the average American approaching retirement, you have at least a few thousand dollars in credit card debt. This translates into high monthly payments.

Even if you’re a couple of decades away from retirement, habitual credit card debt could be ruining your Golden Years. Wondering how credit card debt is already ruining your retirement and how you can fix the problem? We’ll tell you here.

Your biggest asset is your income

Credit card debt is such a huge problem for those approaching retirement, since one of your biggest assets is your income. When you give away that income to high interest payments, you lose out on better ways to leverage your income to save for retirement.

Let’s say you’re the average American with $6,500 in credit card debt at a 14.5 percent interest rate. That means your estimated initial minimum payment will be $130 a month. And if you just pay the minimum, you’ll have to make payments for 26 years to pay off the balance, paying a whopping grand total of $8,938 in interest charges.

A credit card with a low interest rate can help manage some of this problem, but even then, you’re still better off keeping your balances low to none so that you’re not paying any credit card interest at all.

Considering the interest

So credit card debt, when you carry a balance for years, takes away from the income that you can save for retirement. But if you’re like most people, you may still want to split the difference – putting part of your disposable income into retirement savings and part of it into paying extra on your credit card.

But even this isn’t always a great idea. The key here is interest rates. If your credit card has a 15 percent interest rate, but your IRA is only earning 8 percent, it almost always makes more sense to pay off your credit card debt ASAP, and then to put more money into your IRA. You’ll get more bang for your buck this way – by paying off the credit card as quickly as possible, you’ll save more interest than you would make by putting that extra money into retirement savings.

The only exception here is if your company matches part of your retirement savings. If you get a company match, you’re getting free money. Don’t pass it up. Contribute enough annually to your retirement account to get all of the possible company match.

Credit card debt in retirement

Another of the major problems with debt is that it gets you into bad financial habits, which you’re likely to carry over into retirement with you. If you’re constantly living beyond your means now, how much more likely will you be to live beyond your means once your income is cut back during retirement?

And if credit card debt before retirement stunts your retirement savings, credit card debt during retirement absolutely strangles your lifestyle. That $200 a month in minimum payments now may not seem like a big deal, but once you’re living on a tighter retirement income, it could be a huge chunk of change for you every month.

That’s why it’s so important to cultivate good credit habits well before retirement. When you live on less than you make before retirement, save up a lot of money, and get out of as much debt as possible, you’ll be able to truly enjoy your Golden Years – rather than carrying all that financial worry with you so that you’re still sweating the small stuff at age 70 or 80.

The benefits of living debt-free

Living free from credit card debt – and retiring completely debt-free, as much as possible – isn’t an impossible goal, and it’s a good goal to have in your financial life. This doesn’t mean that you never use credit cards. You can use them for their benefits, for sure, as long as you pay them down every month – or within a very short amount of time if you do finance a larger purchase like a new fridge or washer.

When you’re living without credit card balances and other high-interest debt, you can free up more income to save for retirement, making it easier to enjoy those years even more. You’ll also have more free cash for doing other things you want to do, like traveling or enjoying time with your family.

It can’t be overstated that carrying a large credit card balance just to finance your little “wants” in life is a terrible idea financially. So start busting that credit card debt today, and make a habit of properly managing your credit cards so that they don’t end up ruining your retirement.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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