Credit Card Interest: You're Paying Much More Than You Think Thanks To Uncle Sam

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Prior to 1986, taxpayers could deduct the amount that they spent on credit card interest from their tax bill. Since the Tax Reform Act of 1986 took effect, this is no longer the case. Without that deduction, consumers are paying interest on credit card bills with “after-tax dollars,” or money they have already paid taxes on.

Consumers who pay interest on credit card debt each year are shooting themselves in the foot--twice, metaphorically speaking.

While interest paid on “good debt” such as mortgages can be deducted from a tax return, interest paid toward credit debt cannot, meaning that credit card interest is paid with “after-tax dollars”—money that has already been taxed., an award-winning web site dedicated to credit card debt education, wants credit card users to understand that credit cards actually cost more than they realize. Nancy Castleman, a contributor and author of “Invest in Yourself: Six Secrets to a Rich Life”, says that once consumers understand how much credit card bills are really costing, they may be even more motivated to get out from under their debt load. This is one more reason for credit card holders to pay down their debt and stop paying interest on credit card debt.

To illustrate this point, Castleman offers the following real-life examples:

1.    An excellent credit rating may qualify a consumer for a 7.99% Pulaski Bank Card, however, that rate shoots up to 11.68% if you figure in taxes.

2.    A typical secured credit card (that allows you to establish or rebuild credit) might hold a rate of 16.65%. This rate becomes 24.34% if you live in a state with an average tax bite.

3.    A cardholder paying a whopping 30% APR, because of universal default where late payments on one card or other bill may lead to much higher rates on all cards, is really paying an unbelievable 43.86%.

To understand how these figures are obtained, it is important to understand the average taxpayer’s tax burden. According to the non-profit, non-partisan Tax Foundation, on average, taxpayers will spend 116 days at work in 2006 to cover assorted tax bills (tax burden), which amounts to 31.6% of the taxpayer’s income. The organization has declared April 26, 2006 to be “Tax Freedom Day:” the day when Americans have finally worked enough to pay their annual tax bill and start working to pay their own bills.

Included in these after-tax bills are credit card bills, including the interest accrued on credit card debt. A simple equation serves to help a taxpayer understand how much those credit cards are really costing.

Credit Card Interest Rate

100 – Tax Rate

Example: An APR of 13.77% divided by 68.4 (100 – 31.6) = 20.13%

This should be an encouragement to those who are paying interest on a credit card balance to pay down that debt so that more of their ‘after tax’ dollars can go toward useful purposes—such as savings. For more information on decreasing credit card debt, consumers can reference, the most comprehensive online site for comparing credit cards, and a source for free education materials about credit and debt.

About launched in 1998 by parent company Citizens for Fair Credit Card Terms, Inc with the primary goal of aiding consumers by rating credit cards and educating about credit cards. This free site has become the most comprehensive online source for comparing credit cards with staff reviews of over 500 credit cards in 60 categories including a searchable database containing detailed information relating to credit card terms and conditions, and a cardholders review report which boasts over 17,000 consumer reviews of over 900 credit cards. Numerous news agencies and publications reference the information provided on the site. For more information about what makes a unique site, please go to


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Curtis Arnold
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