If you randomly asked 10 people to reveal what was in their wallets you would more than likely find credit cards taking up the lion's share of the space. Unfortunately they also cost the most when it comes to interest charges. One of the critical keys to investing is only to use money that is free of other obligations. Thus, if you are carrying a balance on your credit cards, it’s not free, and neither are you. Here's why...

Many credit cards have an annual interest rate of 18% to 23%. Let's say you have R5 000 to invest, but you also have R5 000 in credit card debt with an average annual interest rate of 18% (lets be optimistic)... If you invest the R5 000 instead of using it to pay off the credit card, you will have to get an 18% return on your investment after taxes (or about 24% before taxes) just to break even.

Credit card debt remains probably the single best answer to the question: "Why can't I ever seem to get ahead?"

There are more than a billion credit cards in circulation in the United States - that's almost four cards for every American man, woman and child. And nearly 70% of all credit card holders in the US today carry a revolving card balance each month (i.e. they are paying the minimum amount due).

South Africans are in the same boat. With an annual interest rate of 18%, making minimum payments (2% of the balance or R10, whichever is greater) on just a R1 000 balance is going to take you a little over 19 years to pay off, during which time you will pay close to R1 900 in interest on that R1 000! It's enough to want to get into the credit card issuing business, isn't it?

As you now chart your path to becoming a more savvy investor, you can simply not pass go until you have your debt under control.

Adapted from motleyfool.com


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