Fiscal Investor • Money Minute
APR Reality Check: The Math That Changes Everything
Why a 20% credit card trumps most investments — until it’s gone.
Here’s a financial truth that sounds wrong but isn’t: paying off a credit card at 20% APR delivers a guaranteed return that beats almost any realistic investment. This one decision changes your trajectory.
Think of it as your first high‑impact “investment”: eliminate the negative compounding before you chase positive compounding.
The Investment Nobody Talks About
Paying off debt isn’t just removing a payment — it’s earning a return equal to the interest rate on that debt. Unlike markets, this return is certain.
Example: $1,000 in a 4% savings account earns $40/year. The same $1,000 on a 20% card costs $200/year. Keeping both is like making $40 while paying $200 — a $160 loss for “peace of mind.”
Let’s Compare Returns
Typical “Good” Returns
- High‑yield savings: ~4–5%/yr
- Investment‑grade bonds: ~4–6%/yr
- Stock market (long‑run avg): ~10%/yr
- Great stock year: ~15–20% (not guaranteed)
What Debt Costs
- Credit cards: ~18–29%/yr (often 20–24%)
- Store cards: ~25–30%/yr
- Personal loans: ~8–15%/yr
- Auto loans: ~5–12%/yr
Key insight: A 20% APR beats almost any investment you can reliably get. Paying it off is a guaranteed 20% return.
The Guaranteed 20% Return
Wipe out $5,000 at 20% APR and you’ve effectively “earned” $1,000/year by removing that interest cost. No volatility. No guesswork. Just certainty.
“But What About Building Wealth?”
You are building wealth when you stop interest from compounding against you. Here’s a simplified five‑year thought experiment with $10,000 to deploy:
Scenario A: Invest While Carrying 20% Debt
- Invest $10k at 10% → $16,105 after 5 yrs.
- Keep $10k on a 20% card → ~$10k interest over 5 yrs (not counting principal!).
- Looks okay on paper, but cashflow, minimums, and risk make it worse in practice.
Scenario B: Kill the Debt, Then Invest
- Use $10k to pay off the card → interest cost drops to $0.
- Redirect freed cashflow (e.g., $2000/yr) into investments at 10%.
- After 5 yrs you’re debt‑free and invested — with momentum.
Real‑world kicker: Most people don’t actually invest while carrying card debt — they spend it. Option B wins because psychology beats perfect math.
The Snowball Effect
Pay off a card and free the payment. If you were sending $300/mo to interest, that’s now $300/mo available for investing or crushing the next debt. Momentum compounds.
When Investing Before Payoff Makes Sense
- 401(k) match: Always contribute enough to get the full match (instant 50–100% return).
- Very low rates: Mortgages ~3% or student loans ~4% can be paid slowly while you invest.
- After high‑APR is gone: Then go aggressive on investing.
The Interest That Never Stops
Credit card interest compounds against you. Carry a balance and you pay interest on interest. A $5,000 balance at 20% APR with only minimums (2–3%) can take 15+ years to clear and cost $10,000+ in interest — buying everything twice.
The Freedom Factor
Debt kills options. Paying it off buys you room to take career risks, start a business, switch roles, or weather a storm. Freedom is a return you can’t chart — but you feel it.
Your Action Plan
- Stop using the cards. Freeze them. Cut them up if you must.
- Build a tiny emergency fund: $1,000 so surprises don’t push you back onto plastic.
- List debts by APR. Highest rate first.
- Pay minimums on all, throw every extra dollar at the highest APR.
- Snowball forward: When one is gone, roll that payment to the next.
- After payoff: Redirect the whole freed cashflow into investing.
The Bottom Line
A 20% APR is a financial fire. Put it out first. Paying off high‑interest debt may not feel like “investing,” but it is — with a guaranteed double‑digit return. Kill the APR, then invest with a clean slate and let compound interest work for you.
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