People are always looking for that next big investment. Whether it’s the next tech company, cryptocurrency, or real estate, people are always looking for something that will bring home big returns. In the 90’s it was Beanie Babies, then it was Pokémon cards, now it’s Funko Pops. But I’m here to tell you the best way to consistently get returns–at around 20%! Here is the best investment you can make:
Pay off your dang credit card
There it is. That’s all there is to it. It may not be glamorous, but paying off your credit card is the best investment you can make right now. It’s better than Amazon, Apple, Bitcoin, real estate, or government bonds. Why is that? The median interest rate on a credit card right now is 19.96% (source), and that’s historically low. In 2019 the median interest rate was 21.3%, and the average maximum APR was 24.98%. Meaning if you had a $1000 credit card balance, every year you were paying $250 in interest.
As of 2021 Americans owed over $807 billion in credit card debt that comes out to $6,270/family (source). $6,270 on a credit card with a 19.96% interest rate comes out to $1,251.49/year in interest. That’s over $100/month just in interest!
How does this happen?
Most credit cards only require you to make a minimum payment each month. This minimum payment is usually around $30 or 1% of your balance, whichever is greater. In our example of the average family, if they only pay $30/month towards their credit card, they’re actually going $70 more into debt every month. Even if they never use their card again! This is how credit card companies make money. They let you ignore your balance and only charge you a small fee, then charge you interest on that balance.
Bank of America, for example, charges a minimum payment of $35 or 1% whichever is greater. If you have a past due balance on your credit card of $4000, the minimum would be 1% of that or $40. If the interest rate on that card is 20% (the national median) then the APR equates to 1.67%/month. The interest on $4000 would be $66.67/month. $66.67 in interest minus your $40 payment equals $26.67 added to your balance. You paid $40 towards your credit card and instead of going down, your balance went up by $26.67!
Paying credit card debt is better than playing the stock market
So you can see how making the minimum payments on a credit card is a terrible idea. By keeping a balance on your card you are losing 20% annually. This is the same as making a negative 20% return on investment. So if you have $4000 in credit card debt but also have $4000 in the stock market making a 10% annual return (pretty good for the stock market). Then you are actually making a net 10% loss.
10% + -20% = -10%
In this case it would actually be a better investment (much better) to take all of that money out of the stock market and put it towards eliminating your credit card debt. If having a credit balance is a negative 20% return then any money put towards paying that balance would be like making a 20% annual return on that investment.
A 20% annual return is unheard of in the work of investing. Anything that consistently returns 20% would be the most popular investment ever. Let’s see how other popular investments compare. Between 1985 and 2020 these following assets have returned:
| Large cap stocks (S&P 500) | 9.6% |
| Real Estate | 8.5% |
| United States Bonds | 4.1% |
| Gold | 3.2% |
Even if you consider Bitcoin’s meteoric rise to nearly $50,000, in the last 6 months it has lost 24.26%. Bitcoin has made some people super rich, but its volatility is so great that no fund manager would choose it over something that consistently returns 20% per year. Remember even during stock market crashes credit card rates stay above 10%. Even at the worst point in the 2008 financial crisis, the average interest rate on credit cards was 12%. Even at its lowest point in the last 30 years, paying off a credit card was a better investment than the average return of the S&P 500.
Credit card debt is an emergency
In a recent survey Bankrate found that that 54% of Americans say that have more emergency savings than credit card debt. 54% of Americans could pay off their credit card debt and make a 20% return on that investment. Even if you don’t pay off the balance in full, everything put towards paying of that balance is the same as making a 20% return on your investment.
More than half of Americans said that increasing their emergency savings was a higher priority than paying down credit card debt. Newsflash: credit card debt is an emergency! Many Americans hold revolving credit card debt while also contributing to a 401(k). Now I’m not one to recommend ignoring your 401(k), but remember if your 401(k) is making a 10% return (above average) then you are making a net loss of 10% by contributing to your 401(k) rather than paying down credit card debt.
Unless you can make an investment that returns greater than 20%, your best option is always to pay down credit card debt. Why make a 7% return when you can make a 20% return?
Conclusion
All of this assumes you are going to stay out of credit card debt after paying off your balance. It doesn’t do you any good to divert money from your 401(k) contribution to pay off your credit card just to then max out your card. Then you’re back where you started and you missed out on gains in your 401(k). This requires a changed lifestyle.
Like anything else in life, having a plan is the first step. If you are in credit card debt, make a plan to pay it off as soon as possible. Be committed to that plan even if it means living on less or pausing other investments, because paying down your credit card balance is the best investment you can make.
This advice also applies to other high-interest debt. Most student loans have low interest rates, but some private loans can have up to 13% APR. Paying only the minimum of debt will just leave you further in the hole. Make a plan to tackle high interest debt and commit to that plan.
What do you guys think? Is there a better investment out there that I didn’t think of? What are some good reasons to keep a credit card balance? Let us know in the comments below!