Credit Card Interest: You're Paying Much More Than You Think ... Thanks To Taxes
By Nancy Castleman, CardRatings.com Consumer Reporter
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:
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:
Unfortunately, the folks at the Tax Foundation were right. Last year, "only" 29.1% of our incomes went to taxes. To now be devoting 31.6% - 2.5% more - may not seem like a big increase. But it is! It means that our tax bills alone went up by close to 8%. Ouch!
According to the Tax Foundation, the heaviest tax burdens in 2006 are in Connecticut, New York, New Jersey, Massachusetts, Maine, and Rhode Island. So if you live in one of these states your tax rate is higher. People living in Alabama, Alaska, Mississippi, Oklahoma, Tennessee, and New Mexico will pay the least overall in taxes and would have a somewhat lower rate.
Figure Out How Much You Are Really Paying
The math is pretty easy. All you have to do is take the credit card interest rate and divide it by 100 minus your tax rate.
Example: 13.77% divided by 68.4 (100 - 31.6) = 20.13%
Once you know how much your credit card bills are really costing, you may be even more motivated to get out from under that debt load. Hope so!
We welcome your comments about credit and money issues in our popular credit forum!
Nancy Castleman has spent 20+ years helping people get out of debt, save money, and live better on less. Along with her partner, Marc Eisenson, Nancy is known for her work on mortgage pre-payment, and for first explaining "credit card math" in her often acclaimed free e-letter, The Pocket Change Investor. Find it, along with many articles from back issues, special reports, link picks, and book reviews, on her Good Advice Press Web site. You can also see pictures of her 10,000 sq ft organic garden and her nine grandchildren!
But what she'd most like you to do is read about her book, Invest in Yourself (Wiley, 1998, 2001), which she wrote with Marc Eisenson and Gerri Detweiler. Nancy considers this book, which discusses how to invest your time, energy, and money to create the life you want, to be her life's work. Nancy's books have received rave reviews in leading national publications, including USA Today and Money Magazine.
CardRatings.com is the most comprehensive source for comparing credit card offers. CardRatings.com is pleased to offer consumers free credit card ratings.
Please Note! You are welcome to republish this article as long as you state that CardRatings.com is the source for the article. You must also include a link to our website if you republish the article online. Click here for more details about using our articles and thanks for your interest!
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:
- 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.
- 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.
- 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%!
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. ..."
Unfortunately, the folks at the Tax Foundation were right. Last year, "only" 29.1% of our incomes went to taxes. To now be devoting 31.6% - 2.5% more - may not seem like a big increase. But it is! It means that our tax bills alone went up by close to 8%. Ouch!
According to the Tax Foundation, the heaviest tax burdens in 2006 are in Connecticut, New York, New Jersey, Massachusetts, Maine, and Rhode Island. So if you live in one of these states your tax rate is higher. People living in Alabama, Alaska, Mississippi, Oklahoma, Tennessee, and New Mexico will pay the least overall in taxes and would have a somewhat lower rate.
Figure Out How Much You Are Really Paying
The math is pretty easy. All you have to do is take the credit card interest rate and divide it by 100 minus your tax rate.
Credit Card Interest Rate
100 - Tax Rate
100 - Tax Rate
Example: 13.77% divided by 68.4 (100 - 31.6) = 20.13%
Once you know how much your credit card bills are really costing, you may be even more motivated to get out from under that debt load. Hope so!
We welcome your comments about credit and money issues in our popular credit forum!
Nancy Castleman has spent 20+ years helping people get out of debt, save money, and live better on less. Along with her partner, Marc Eisenson, Nancy is known for her work on mortgage pre-payment, and for first explaining "credit card math" in her often acclaimed free e-letter, The Pocket Change Investor. Find it, along with many articles from back issues, special reports, link picks, and book reviews, on her Good Advice Press Web site. You can also see pictures of her 10,000 sq ft organic garden and her nine grandchildren!
But what she'd most like you to do is read about her book, Invest in Yourself (Wiley, 1998, 2001), which she wrote with Marc Eisenson and Gerri Detweiler. Nancy considers this book, which discusses how to invest your time, energy, and money to create the life you want, to be her life's work. Nancy's books have received rave reviews in leading national publications, including USA Today and Money Magazine.
CardRatings.com is the most comprehensive source for comparing credit card offers. CardRatings.com is pleased to offer consumers free credit card ratings.
Please Note! You are welcome to republish this article as long as you state that CardRatings.com is the source for the article. You must also include a link to our website if you republish the article online. Click here for more details about using our articles and thanks for your interest!
posted by CardRatings.com at 12:22 PM
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