In our financial planning business, we see two kinds of credit card users:
- Those who use credit cards for convenience, security, and rewards.
- Those who use credit cards for their emergency funds.
We cautiously support the first type of use and strongly discourage the second.
We seldom see credit card debt over $10,000. Like a wrinkle on linen pants, ongoing debt larger than this clings to the user.
When we see a client or prospective client who keeps both a credit card balance and a healthy investment profile, our advice is almost always to pay off that high-interest debt. In case you missed it, credit card interest today averages 20+ percent. Stock market returns do not.
Research on credit card holders by Scott Schuh at West Virginia University finds that about half of credit card users pay off their balance in full each month, and half keep a balance. He also notes that this behavior tends to be lifelong.
Meet Susan
Let’s look at how ditching the debt could help a hypothetical client we’ll call Susan.
Susan is a widow who has $650,000 invested. She also keeps her credit card balance around $8,000, which is close to the national average. Her savings and checking total $15,000.
My experience with clients like Susan is that she likes having money in savings and dislikes drawing on her nest egg. She uses her credit card for bigger-ticket items that come up and makes monthly payments from her income. Of course, her nest egg is a backstop so things don’t get out of hand.
We would recommend that Susan pay off her credit card debt and establish a larger emergency fund. That fund would be replenished by ongoing contributions from her income that are currently paying credit card interest.
Assuming Susan is 61, which is old enough to not pay a penalty on IRA withdrawals, let’s have her make a withdrawal to pay off that balance. It will cost $10,000 at a 20 percent tax rate to net $8,000 for debt payoff.
Meanwhile, if she pays $200 a month to service her debt, she will pay more than $13,000 over nearly five and a half years.
That assumes she doesn’t add to the balance with future purchases! The sad reality is that Susan is usually adding to her credit card debt while paying it off. The cycle never gets broken.
It’s not about the numbers
Unless someone is on a low income and living paycheck to paycheck, the reasons for keeping credit card debt around are overwhelmingly psychological.
This debt is normally a source of frustration and, in many cases, shame. Credit revolvers—another name for those who don’t pay off their balance each month—also report that persistent debt stymies important goals: everything from emergency savings to changing jobs and having children.
Today’s mix of rising prices, increasing digital transactions, and buy now/pay later offerings seems really toxic for those who are accustomed to living with credit card debt. More credit availability historically has meant greater use for those not committed to debt freedom, which is a recipe for hard times in an uncertain economic environment.
Resources:
- WVU Today, “WVU research shows credit card behaviors are lifelong, whether users carry debt or pay balances monthly.” Monday, March 17, 2025.
- Bankrate, Bankrate’s 2025 Credit Card Debt Report