Terrifying 'rule of 72' reveals why you must pay off credit card debt as soon as you can
Anyone with a credit card knows it's easy to get overwhelmed by snowballing debts exacerbated by high interest rates.
But there's a simple rule of thumb that can save your financial life from the brink before it's too late.
The 'rule of 72' is a secret weapon to help keep credit card payments from spiraling out of control - and the beauty of it lies in how easy it is to apply.
In short, if you divide 72 by the annual interest rate on your credit card, you'll be left with the number of years it takes for your debt to double.
The eye-opening formula reveals how you could be unwittingly giving away twice the amount you borrowed in just a few years.
If your credit card charges 24 percent interest, dividing 72 by 24 means your debt will double every three years if left unpaid.
So a $1,000 balance will grow to $2,000 over three years, and to $4,000 over six years.
The rule highlights why it's so important to avoid this kind of compound interest by paying off debts as soon as you can.
Anyone with a credit card knows it's easy to get overwhelmed by snowballing debts exacerbated by high interest rates. But there's a simple rule of thumb which can save your financial life
The 'rule of 72' is a secret weapon to help keep credit card from spiraling out of control - and the beauty of it lies in how easy it is to apply
Even if you're making the minimum payments on your credit cards, a significant portion of what you pay is still funneled into interest charges rather than reducing the total.
Most credit cards currently have interest rates ranging between 18 to 30 percent, depending on a user's credit profile and the card type.
The rule of 72 also highlights how important it is to secure a lower interest rate, either by negotiating with your bank or consolidating your debt.
This will slow down the doubling effect and more quickly pay off any outstanding balances.
The rule of 72 can also provide motivation to pay off your highest-rate debts first, to prevent any additional snowballing.
It comes as financial experts warn that a rising number of Americans are only completing the minimum payments on their credit cards each month.
The Philadelphia Federal Reserve's Q3 2024 Insights Report has revealed that 10.75 percent of creditors were only making their mandatory payments in the third quarter of 2024.
It also noted that more consumers are falling behind on their monthly card payments as 30-day delinquency rose by 10 percent to a staggering 3.52 percent.
The rise in delinquent accounts has doubled since the pandemic-era low of 1.57 percent in the second quarter of 2021.
Financial experts are warning credit card holders of mounting debt as data shows rising number of Americans are only completing their minimum payments every month
Concerns about increasing credit debt were also highlighted in 2024's DFAST stress tests that are also conducted by the Federal Reserve
Results showed that banks would face a projected total credit loss of roughly $684 billion - out of which $175 billion would be from consumer credit cards alone
Brian Riley, Director of Credit at Javelin Strategy & Research, explained to Payment Journal: 'The economy is still in tender shape and credit card managers should be aware that there are subtle elements that drive risk.
'The current trend of increased consumers paying only the minimum due is a predictive metric that illustrates household budgets are under continued stress.
'What is important here is that not all card segments are showing signs of stress, but the most fragile segments - those with low FICO Scores, lower incomes, and less experience with credit - indicate downfield risk in 2025.
'When you consider that revolving consumer debt is at an all-time high, the problems of inflation continue to stress household budgets, and issuers must keep a keen eye on vulnerable portfolio indicators.'
Concerns about increasing credit debt were also highlighted in 2024's DFAST stress tests that are also conducted by the Federal Reserve.
These tests 'assesses whether banks are sufficiently capitalized to absorb losses during stressful conditions while meeting obligations to creditors and counterparties and continuing to be able to lend to households and businesses', according to the Reserve's website.
Results showed that banks would face a projected total credit loss of roughly $684 billion - out of which $175 billion would be from consumer credit cards alone.
'Credit card issuers surely make increased income when consumers pay only their minimum due payments, but the revenue is short lived when charge offs move towards 6 percent to 7 percent,' Riley said.
'That is far beyond the 3.5 percent comfort zone issuers managed two years ago.'
