I recently paid a Kohl’s credit card bill. I always pay the full amount each month to avoid interest. However, as I was reading the statement, I noticed that the annual percentage rate (APR) for purchases was an amazingly high 31.24%.
I then researched some other credit cards – these generally have rates based on the class of the debt:
- Discover: 17.24% on purchases and 29.24% on cash advances. Discover has a footnote that the APR’’s will never exceed 29.99%[1]
- Citi: 20.49% on purchases and 29.99% on cash advances.
- Chase: 21.24% on purchases, 29.99% on cash advances, and a third category of Balance Transfers at a rate of 21.24%.
My guess is that all credit cards charge somewhere in these ranges. To me, the most hideous is when a zero percent financing offer gives someone, say, 36 months to pay without any interest charge. However, if one does not pay in full by the end of that term, all interest accrued during the interim, which was waived up to that point, will become part of the balance and accrue more interest at the posted rate.
According to Cardrates.com, the average household credit card debt is $9,654.
Even if we assume Kohl’s rate is an outlier and use a more conservative 20% as an average for purchases, the potential financial impact is significant. 20% interest translates to about $2,000/year, or more than $165/month. This can be a week of groceries for some families.
Getting into this level of debt without a plan can lead to a quick downward spiral – barely touching principle while trying to pay off the interest (some credit card minimum payments are less than the interest, which is even more insidious).
These numbers should serve as a kick in the butt to take a closer look at our own credit card debt.
[1] This is an interesting item. In NJ, the usuary rate limit is 30% for individuals – otherwise one could be subjected to a felony charge and hefty fines. However, as with any law, there are numerous exemptions, one being credit cards. These are exempt from civil usury under the “time-price differential” doctrine, which treats extending credit as a price adjustment for delayed payment. How is that for wordsmithing? I guess Kohl’s read the fine print.