A Case Study on the Cost of Revolving Credit Card Debt

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Revolving credit card debt is a common problem for people across all income ranges. People who have ample income and can easily meet their minimum payments often don't think twice about what its really costing them in wealth.

In fact, keeping a balance on your credit cards is probably costing you much more than you think. Not only does it cost you in interest payments, but also an opportunity cost of not investing the funds you paid in interest.

What is Revolving Debt?

Revolving debt is a credit line that allows you to borrow again after you pay off the principal (or original amount your borrowed), up to the max amount of your credit line. Its revolving because you can borrow on it over and over again.

Credit cards fall into the revolving debt category because you can borrow from the credit card company over and over again, up to the maximum allowed on your credit line.

This differs from an installment loan, in which you borrow a one-time amount and then pay it off in fixed installment payments. Once you pay down the principal, you can't re-borrow on an installment loan.

Case Study on Revolving Credit Card Debt

In order to demonstrate the issue, let's examine a case study of Jillian and Judy to compare how they handle their use of credit cards, and what the true cost/benefit is to their wealth profiles.

Jillian the Spender vs Judy the Saver Cartoon
Jillian the Spender vs Judy the Saver
Carrying balances on your credit cards is expensive.

Jillian is our big spender. She loves to shop. She carries four credit cards, with balances that add up to a total of $10,000.  Here's her revolving credit card profile:

Jillian's revolving credit card debt profile
Jillian's revolving credit card debt profile

Jillian pays just $170.42 in interest every month, and she also pays a few hundred extra dollars in payments on each card, making her feel like she's paying down her debt. However, she uses her cards to make new purchases every month, and the actual balance hasn't budged in a while.

If Jillian continues to keep the same spending habits, she will pay over $10,225 in interest expense over the next 5 years, and $40,900 over the next twenty years.


-Robert Kiyosaki
The Opportunity Cost of Revolving Credit Card Debt

Meanwhile, Jillian's sister Judy has no credit card debt, and is depositing $170.42 into her brokerage account every month. She's saving for financial freedom, and plans to use the funds to help her buy rental property in the future.

For now, its invested in the market and she earns an average of 8% per year on her investment. Judy saves much more than $170.42 per month, but we will use that amount to demonstrate the total cost of Jillian's spending habits.

Judy's Investment Schedule w/ Earnings over 5 & 20 Years
Judy's Investment Schedule w/ Earnings over 5 & 20 Years

What to do if you have Revolving credit card debt

If you're currently carrying credit card debt, your best option is to pay it off as quickly as possible. Don't worry about saving money until its paid off (except for some emergency cash). Pour all of your extra dollars into paying it down, and get your balances to $0.

  • Create your own debt profile, like Jillian's. Here's a free worksheet in Excel:
  • Decide which you want to pay first – target either
    • Lowest balance cards
    • Highest interest rate
  • Calculate how much you can spend paying down your cards
    • Create a budget
    • Reduce your cost of living
    • Sell stuff around the house on Ebay, Facebook marketplace, or Craigslist
  • Now the fun part – calculate how much you'll be able to save and invest after your revolving credit card debt is gone.
  • Stay focused on your goals by tracking your progress every month. Create a chart and show your monthly balances decreasing. This is an exciting process!

Remember – every time you make a principal payment on your revolving credit card debt, you're increasing your net worth.

Is it ever okay to use credit cards?

Yes, its okay to use credit cards to make purchases that you can pay off in the same month. As a general rule, never buy anything with a credit card that you can't pay for in cash.

Here are three reasons to use credit cards for a positive effect on your financial outlook:

  1. Credit cards increase your credit score by building a credit history.
  2. Some credit cards offer rewards, like points for travel, cash back, or other rewards.
  3. Credit cards can be used at hotels and other venues to secure a deposit without having to use actual cash.

As a general rule, never buy anything with a credit card that you can't pay for in cash.

However, none of the above reasons result in a positive gain if you don't pay your credit card balances in full each month.

Do you use credit cards in positive or negative ways?


A Case Study on the Cost of Revolving Credit Card Debt

13 thoughts on “A Case Study on the Cost of Revolving Credit Card Debt”

  1. It was drilled into me that debt is bad as a child. We never had a credit card. Now as an adult we have credit cards but pay them off in full at the end of each month.

    • Paying your balances off every month is a GREAT strategy for your credit score! I use an Amazon card for the 5% discount on essentials we buy. I combine it with the subscribe & save feature to max out at 20% off on some household items.

  2. I couldn’t agree with this more. Typically, I pay off my credit card balance each month since I only use it for necessities. But, after buying a home, I put some furniture and other items on my credit card, and this is the first time I have a revolving credit card balance. It stresses me out! I’ll be able to pay it off next month, but I don’t even want to think about how much money I’ve paid back to the company just in interest over the last few months!

  3. So a few years ago, I decided as part of my personal growth bucket list to get rid of ALL revolving credit card debt and closing all Credit Cards. I know a few very successful people who are cash and carry only and I decided to model them and let me tell you, it has been GREAT! I dont have the stress anymore of making minimum payments and struggling to pay off my debts anymore! I do love how you share how to get rid of revolving credit card debts. It was the best thing I ever did!

  4. That’s a good information as some people still lack this knowledge and it will be useful for them to understand the actual way to use. I have seen some of my close family members and even friends misusing the benefits of credit card. Later on, they regret it but ya, they don’t seem to improve.

  5. I don’t use credit cards because for me it cannot help me to save money great to know about Revolving Debt that gives me learning that I can use in the future when I decide to use credit cards.

  6. This is a perfect way to explain credit card debts and I agree with you that carrying a balance on our credit card is indeed expensive. The interest cost may seem insignificant but in the long run, you’d be surprised at how big it sums up to.

    Thus, it is important that we use our credit cards when we have the capacity to pay it in full.


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