Arranging a wedding and going on a honeymoon can be expensive, which leaves many newlyweds with credit card debt. Investing money in assets like stocks, mutual funds and real estate is important for building savings for retirement, but credit card debt can reduce your ability to invest by draining money from your monthly budget.
You Need Money to Make Money
You can't invest in anything if you don't have cash to purchase investments. The primary reason credit card debt affects your ability to invest is that interest payments on credit cards eat cash that you could otherwise commit toward investments. Even a small credit card balance of a thousand dollars or less can result in owing over a hundred dollars in annual interest, which is a hundred dollars you can't save or invest.
Credit Card Fees
Credit card companies tack on a variety of fees on their customers as a way to raise additional revenue. Each fee that you incur is money you can't put toward your investments. Activities that may incur fees include: making late payments, going over your credit limit, foreign transactions and getting cash advances. In addition, some credit card companies charge annual account fees that you have to pay even if you use you don't have a balance on the card.
Paying Off Debt versus Investing
Since credit card debt and fees can divert money away from your investments, it is often better to eliminate credit card debt as quickly as possible and then start investing once you are debt-free. Most credit cards carry interest rates that are 10 percent or higher, meaning you would have to find investments with a 10 percent annual return or better simply to match the rate at which you are losing money due to credit card debt. While it is possible to earn a 10 percent return in risky investments like stocks, you can also lose money. Paying off a credit card is a sure thing.
Another way credit card debt can potentially harm your ability to invest is by damaging your credit score. Your credit score is a number that lenders use to determine the rates you pay on new loans like car loans and mortgages. High credit card balances, late payments, as well as your pursuit of new credit, including the number of recently opened accounts can hurt your credit score, which can result in increases in the interest you pay on your credit cards. A poor credit score can also make it harder to get approved for a mortgage and invest in a home.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.