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The Horror of Credit Card Debt Thumbnail

The Horror of Credit Card Debt

All debt is predatory, especially the kind that carries a double-digit interest rate meaning over 10%. As Ben Franklin said “compound interest is the 8th wonder of the world” for investors and lenders who benefit from interest earned and capital appreciation. It is a horror show for those borrowing money at double digit rates. The worst and most widespread debt that literally makes and keeps people poor by the millions is credit card debt.

The average annual percentage rate (APR) on a credit card in the United States is 16.86%. If a credit card is used, the balance should be paid off during the grace period, which is normally 21-30 days, so that no interest is charged. Credit card debt is the one of the worst sources of debt available anywhere. Fees are assessed for late and below minimum payments in addition to the high interest rate. The annual percentage rate (APR) on credit cards is not actually the effective percentage rate (EPR) that all people pay on continuing balances. Interest is calculated daily on balances using the annual percentage rate (APR). The compounding effect of calculating the interest daily increases the interest rate to the effective percentage rate (EPR). 

 Example: Let’s say your credit card charges an annual percentage rate (APR) of 16.86%. You buy $10,000 of goods on a Visa bank card and keep that balance on the account. The 16.86% rate is applied daily. This creates a compounded rate is higher than the 16.86% advertised. How much higher? The annual daily compounded effective percentage rate (EPR) is 

 (1+.1686/365 )^365-1=.1836 or 18.36%. At this compounded rate the $10,000 will be $11,836 after year 1, $14,009.10 after year 2, $16,581.18 after year 3, $19,625.49 after year 4. The balance will double to $20,000 in 4.28 years at the effective percentage rate 18.36%.

If you use a credit card, pay off the balance in full during the grace period so that no interest is ever charged.  


Conversion from Annual Percentage Rate (APR) to the Effective Percentage Rate (EPR)

APR-annual percentage rate

EPR-effective percentage rate

ACP- annual compounding period


Example: This is using 16.86% as the APR and the annual compounding period as every hour in a year.  There are 365 days multiplied by 24 hours in a day or 8760 hours in a year. This approximates continuous compounding:    

18.36% =(1+  .1686/8760 )^8760-1

Here is an example of how to calculate the loan balance for an APR of 18.36%, the number of compounding periods-365, each day, for n numbers of years. Any number of years can be plugged in to determine the loan balance after a certain number of years. In this case, 6 years will be used. The initial Debt will be $10,000.

n= Number of years compounding

Future Loan Value= Initial Debt*(1+APR/ACP )^(ACP*n)

$30,081.43   =$10,000 (1+  .1836/365 )^(365*6)