Credit Card Interest: You're Paying Much More Than You Think ... Thanks To Taxes

Written by CardRatings.com
Posted On: April 11, 2006

In years past, taxpayers could deduct the amount they spent on credit card interest. But once the Tax Reform Act of 1986 took effect, that was no longer the case. Without that deduction, we are paying our credit card bills with "after-tax dollars" - that is, money we've already paid taxes on - which means our credit cards are costing us more than we probably realize. A lot more.

Here are three real-life examples:

1. Are you proud of the 7.99% Pulaski Bank Card you just qualified for, thanks to your excellent credit rating? It's really going to cost you more like 11.68%, once you factor in taxes.
2. Are you establishing or rebuilding credit with a secured credit card? The 16.65% rate you may pay on a typical secured card becomes 24.34%, if you live in a state with an average tax bite.
3. Are you paying around 30%, because of universal default, where late payments on one card or other bill may lead to much higher rates on all your cards? You better sit down .... because your real interest rate is 43.86%!

How Can this Be?!?

As painful as April 15th is for most of us (April 17th, this year!), the amount we pay in federal, state and city income taxes are only part of the picture, even when we factor in the dreaded alternative minimum tax, capital gains, Social Security, and Medicare. Many of us also pay sales tax on almost everything we buy, as well as property taxes - to repair and plow roads, to educate children, and to cover other local services.

Then there's unemployment insurance, plus the taxes we pay on: every phone call we make, every kilowatt of electricity and ounce of home heating oil/natural gas that we use, to say nothing of the gallons of gas we pump into our car tanks. The list goes on and on ... and on ... to include over 50 separate taxes that we may well pay on a regular basis!

According to the non-profit, non-partisan Tax Foundation, on average, we will spend 116 days at work in 2006 to cover our assorted tax bills, which amounts to 31.6% of our income! The organization declared April 26, 2006 to be "Tax Freedom Day," since paying 31.6% of our incomes amount to working from January 1 until April 26 for the government.

Tax Freedom Day 2006 is later in the year than it has been for the last few years. As Bill Ahern, the Tax Foundation's Director of Communications, explained it to me before the 2006 figures were released:

"Last year's estimate was April 17, but since then we've seen higher incomes than forecast, lower unemployment than forecast and no major tax cuts, so everyone's expecting a later date. ..."