As interest rates climb, your credit card debt becomes a silent wealth tax

By Ed Durant for BHG Financial

For individuals with strong credit ratings and reliable income, maintaining a balance on credit cards can seem like a manageable decision. However, in an environment where interest rates are rising, annual percentage rates (APRs) exceeding 20% can make this choice significantly more costly, as these revolving balances accumulate interest at a much faster rate than many anticipate.

The impact of this interest may not seem immediate, but it is constant and can divert funds that could otherwise be allocated toward savings, investments, or enhancing financial flexibility. This is why high-interest credit card debt can be likened to a monthly “wealth tax,” a burden that is effectively paid from money that individuals have already earned through their labor.

Credit card APRs are closely linked to benchmark interest rates, meaning that fluctuations in the economy can dramatically increase the cost of revolving debt, particularly when the Federal Reserve raises its rates. According to the Federal Reserve, the average APR for credit cards with outstanding balances was approximately 22.14% in the second quarter of 2026, up from 21.52% in the first quarter of the same year. Just ten years prior, the average APR was around 13%, marking a significant increase of nine percentage points during a period when the federal funds rate rose only about three points.

This trend can be partially attributed to the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, which restricted issuers from increasing interest rates on existing balances. As a result, credit card companies responded by raising rates across the board, effectively ending the era of low-rate credit cards for consistent payers. Additionally, rising delinquency rates in 2022 and 2023 have led to even higher rates, compounding the effects of the Federal Reserve's rate increases.

Consequently, credit card interest rates have established a high baseline that is likely to persist, irrespective of changes in Federal Reserve rates. Unlike fixed-rate mortgages, business loans, or personal loans with defined terms and predictable payments, credit card balances increase more rapidly due to variable rates and daily compounding interest.

For instance, if an individual carries a $50,000 revolving balance at a 22% APR, they could incur over $10,300 in interest within a year, not accounting for the compounding effect of maintaining that balance month after month. This interest is deducted from after-tax income; therefore, for someone earning in the 35% federal tax bracket, covering $10,300 in interest would require nearly $16,000 in gross income, before considering state taxes. Additionally, those funds could have been utilized for retirement savings, increasing liquidity, or paying down principal on other debts.

When considering investment opportunities, the stock market has historically returned about 8% to 11% annually over the last five decades, serving as a viable benchmark for long-term wealth accumulation. However, when borrowing on a credit card at 22% while potentially earning 10% in the market, individuals find that every dollar in revolving credit works against them at a rate more than double what it could earn elsewhere.

Having cash available is crucial for various financial endeavors such as saving for retirement, reinvesting in a business, or purchasing property. When a portion of monthly cash flow is consumed by interest payments, there is less opportunity to engage in these activities. Reducing high-interest balances not only frees up funds for investments and reserves but also improves credit utilization, which can facilitate future borrowing.

For high earners, credit card debt may not seem like a financial burden but rather a temporary convenience. A strong cash flow, substantial credit limits, and confidence in future earnings can make carrying a balance appear less risky. This mindset often leads to justifications such as, “My raise is coming.” According to a recent consumer spending survey by BHG Financial, 14% of individuals with credit card debt are anticipating a raise to pay off their balances. However, relying on future income is an unreliable strategy, as raises or bonuses may not arrive as expected. This may explain why the most common method for paying off credit card debt is making minimum payments, reported by 38% of respondents.

Many individuals also hold the belief that their debt situation is “only temporary.” However, revolving balances tend to persist. When asked about their plans to pay off credit card debt, 15% of respondents indicated they expected to carry it for their entire lives, with that number increasing to 25% among Baby Boomers. While higher incomes can provide a financial buffer, managing revolving debt still necessitates a thoughtful budget and cash flow strategy.

Moreover, high earners often resist liquidating investments to pay down high-interest debt, despite the math supporting such a decision. This reluctance is often fueled by the expectation that future investment returns will outpace borrowing costs. However, a 20%+ APR represents a guaranteed expense, while market gains are never assured.

Finally, many individuals are drawn to credit card rewards programs, which, while appealing, are primarily funded by the interest paid by those who carry debt. A report from the Consumer Financial Protection Bureau (CFPB) found that for many borrowers, the rewards do not outweigh the costs associated with credit cards. Consumers who carry balances frequently end up paying significantly more in interest and fees than they receive in rewards, and those with poor credit often cannot access these programs.

It is important to recognize that not all debt is detrimental. Certain types of debt can contribute positively to wealth accumulation, but high-interest credit card debt often works against financial goals.