How Credit Card Debt Can Affect Your Retirement Savings


It’s no secret that credit card debt is a serious issue, especially with the cost of living steadily increasing and wages not keeping pace. With the total average credit card debt in the U. S. at $1.11 trillion in 2022, it’s become more difficult to stay on top of making on-time payments and even more challenging to save money for retirement. This article will explain how credit card debt can affect your retirement savings—and what you can do about it.

Credit card debt reduces the amount of money you can save for retirement

Credit card debt takes away from the money you could put into your retirement accounts each month. Millennials are estimated to owe an average of $36,000 in student loans and an additional $5,000 in credit card debt. That’s a lot of money that could be going toward retirement investments.  

The high-interest rates associated with credit card debt can  make paying off the balance more difficult, as you’ll pay more each month in interest and fees than you would if you had a lower interest rate.

Credit card debt can cause you to miss out on tax breaks

You may be eligible for certain tax incentives simply by contributing to your retirement accounts. For example, the Saver’s Credit, also known as the Retirement Savings Contribution Credit, is a tax break you may receive for eligible contributions to a 401(k) or IRA. It allows you to deduct up to $1,000 ($2,000 for those who are married filing jointly) of your contributions each year, depending on your filing status, income, and contribution amount.

However, when you have credit card debt, it can be difficult to take advantage of these tax breaks because you’re likely spending a lot of money on interest and minimum payments and may not be contributing enough to the eligible accounts.

Carrying credit card debt into retirement can put a strain on your living expenses

If you carry a large amount of debt into your retirement years, you could find yourself living on a fixed income and unable to afford the basics like groceries and healthcare costs.

Paying off your credit card bills before retirement age is the best way to reduce your monthly costs and increase your disposable income to enjoy a more comfortable lifestyle during your later years.

How to get out of debt to boost your retirement savings

The best way to protect yourself against the effects of high levels of credit card debt is to start paying down those balances as soon as possible. Below are a few ways to get out of debt to boost your retirement savings.

  • Debt Snowball method: This method focuses on paying off your smallest debts first while still making minimum payments on your larger balances. Once you pay off a debt, you’ll roll over that payment amount to the next debt.
  • Debt avalanche method: This method involves paying off your debt with the highest interest rate first, then working your way down. Like the debt snowball, you’ll apply your previous payment amount to the next debt.
  • Debt Consolidation: This option combines multiple debts like credit cards and loans into one loan with a lower interest rate, reducing your monthly payments over time.
  • Balance Transfer credit card: This option allows you to transfer your debt from one credit card to another, offering a lower interest rate. There is typically an introductory rate with a 0% APR (annual percentage rate) that can last for six to 18 months, which allows you to pay off the debt sooner.

The bottom line

No matter how much or little money you have saved for retirement, carrying high levels of credit card debt can still significantly reduce how much money makes its way into those accounts each month. This ultimately impacts how much you will have saved once it comes time for you to retire. Paying down existing balances can increase your monthly retirement savings and provide financial security during life’s later years!