The domino effect of credit card debt

Too much credit card debt spills over into the rest of your financial life. It can affect your ability to save, raise the interest rates you’re charged and may prevent you from buying things you otherwise could.

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Let’s say you have $5,000 in credit card debt, with an APR of 13%, and you’re paying $200 each month. Here’s how your financial life might be affected. (All calculations are based on this scenario except where otherwise noted.)

Your credit score may go down

If your limit is $10,000 CREDIT
Try to limit your debt to $3,000 DEBT

The amount of debt you carry is the second most important factor in determining your credit score, behind only your payment history.

If your debt exceeds 30% of your available credit, your score may go down.


Home and car loans may cost more

Too much credit card debt can impact your credit score, which can in turn hurt your ability to get the best rates on other financial products like auto loans or mortgages.

Consumers with lower credit scores can pay as much as 2 percentage points more in interest, though lenders consider other factors.

That could mean a difference of $68,000* over the life of a $200,000, 30-year mortgage.

*Compares rates of 3.762% and 5.351%
Sources: Zillow, FICO

Emergencies may be more expensive

It’s harder to build an emergency fund when extra cash goes to credit card payments.

If you’re forced to finance an emergency on that credit card, the situation could get worse:

If you charge a $1,000 ER visit*
Payment $50 monthly
Total interest $133
Payoff time Nearly 2 years

*Assumes 13% interest rate; payoff scenario calculated independent of original $5,000 balance.

Everyday spending may feel like a stretch

The money you pay in interest could instead be going toward everyday items. If you’re paying $200 toward your debt each month, your first few payments will include roughly $50 in interest. That’s money that could have gone toward a tank of gas, your cell phone bill or your utilities.

You may have less money for retirement

In this scenario, you’ll end up spending more than $900* in interest over two-and-a-half years to pay off the credit card. If you invested just the interest in an IRA, and earned annual returns of 7%, in 20 years you could turn $900 into $3,500 toward your retirement. Note that investments can lose money.

IRA investment

20 years later

*$900 assumes a $6,000 balance (initial terms plus $1,000 emergency room charge). This is a hypothetical example created for illustrative purposes. It is not indicative of any specific investment. Market conditions will affect investment returns.

You may be giving up the fun stuff

What could you have bought with the $900 you spent on credit card interest?

A big-screen TV, a nice couch or mattress, a vacation, a cooking or woodworking class, or a musical instrument. Or you could have had a nice boost to your savings.

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The material provided on this website is for informational use only and is not intended for financial, tax or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional and tax advisor when making decisions regarding your financial situation.

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