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Credit Card Interest: You're Paying Much More Than You Think ...Thanks To Taxes!
By Nancy Castleman, CardRatings.com Consumer Reporter

In years past, taxpayers could deduct the amount they spent on credit card interest. But once the Tax Reform Act of 1986 took effect, that was no longer the case. Without that deduction, we are paying our credit card bills with "after-tax dollars" - that is, money we've already paid taxes on - which means our credit cards are costing us more than we probably realize. A lot more.

Here are three real-life examples: Are you proud of the 7.99% Pulaski Bank Card you just qualified for, thanks to your excellent credit rating? It's really going to cost you more like 11.27%, once you factor in taxes.

Are you establishing or rebuilding credit with a secured credit card? The 16.65% rate you may pay on a typical secured card becomes 23.48%, if you live in a state with an average tax bite.

Are you paying around 30%, because of universal default, where late payments on one card or other bill may lead to much higher rates on all your cards? You better sit down .... because your real interest rate is 42.31%!

How Can this Be?!?

As painful as April 15th is for most of us, the amount we pay in federal, state and city income taxes are only part of the picture, even when we factor in the dreaded alternative minimum tax, capital gains, Social Security, and Medicare. Many of us also pay sales tax on almost everything we buy, as well as property taxes - to repair and plow roads, to educate children, and to cover other local services.

Then there's unemployment insurance, plus the taxes we pay on: every phone call we make, every kilowatt of electricity and ounce of home heating oil/natural gas that we use, to say nothing of the gallons of gas we pump into our car tanks. The list goes on and on ... and on ... to include over 50 separate taxes that we may well pay on a regular basis!

According to the non-profit, non-partisan Tax Foundation, on average, we spent 107 days at work in 2005 to cover our assorted tax bills, which amounts to 29.1% of our income! The organization declared April 17, 2005 to be "Tax Freedom Day," since paying 29.1 percent of our income amounted to working from January 1 until April 17 for the government.

We'll be working until some time after April 17th for years to come to pay for taxes which will amount to over 29% of our incomes. Ouch!

According to the Tax Foundation, the heaviest tax burdens are in Connecticut, New York, New Jersey, Massachusetts, and Wyoming. So if you live in one of these states your tax rate is higher. People living in Alaska, Alabama, Tennessee, South Dakota and Mississippi paid the least overall in taxes and would have a somewhat lower rate.

Figure Out How Much You Are Really Paying

The math is pretty easy. All you have to do is take the credit card interest rate and divide it by 100 minus your tax rate.

Credit Card Interest Rate
100 - Tax Rate

Example: 13.77% divided by 70.9 (100 - 29.1) = 19.42%

Once you know how much your credit card bills are really costing, you may be even more motivated to get out from under that debt load. Hope so!

About the author -- Nancy Castleman has spent 20+ years helping people get out of debt, save money, and live better on less.

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