This past news week was a big one when it comes to current events. But the biggest news by far was the nomination of Brett Kavanaugh to serve on the Supreme Court of the United States to replace the retiring justice Anthony Kennedy. However, as part of the process of serving as a federal judge, Kavanaugh is required to disclose certain financial information – and boy was there some interesting news that came out of that.
Specifically, Kavanaugh was somewhere between $60,000 and $200,000 (he was only required to report a range, not an exact amount) in debt between three credit cards and a personal loan in 2016, per his disclosures. The culprit, seemingly, was Washington Nationals baseball season tickets and a number of home improvement projects. The good news for Kavanaugh is that he didn’t disclose any credit card debt from 2017, though he did report taking out a loan from his retirement savings.
Look, it’s not our business to judge Kavanaugh on how he uses his credit cards and how he spends his money. But this kind of credit card debt could send the average American into bankruptcy, so if nothing else, this story serves as a good reminder on how credit card debt should be approached and managed.
Here’s a closer look at what we can learn from this story:
Large Sums of Credit Card Debt Cost You
Say Kavanaugh was on the low end of the debt range he reported. That’s $60,000. But consider that the average credit card interest rate is 17 percent, so if you paid this amount off over the course of three years, you’re adding nearly an additional $20,000 in fees to the total debt amount. If the debt was on the high end, $200,000, and it was paid back over the course of the same three years at 17 percent, that’s an additional $56,000. You can see how the credit card companies make their money. Make sure you’re wise about what you charge. Obviously, it’s ideal to only charge what you know you can pay off, but that’s not always practical. Just make sure your spending doesn’t get out of control.
Your Credit Score Could Take a Hit
Outstanding debt accounts for about 30 percent of your FICO score, and certainly owing anywhere from $60,000 to $200,000 is no drop in the bucket, so the average American’s credit score could take a significant hit if they were to accrue this much credit card debt. What’s more is there’s the credit utilization ratio that could also factor into a low credit score. Specifically, the credit utilization ratio is your amounts owed versus your total credit limit. Generally, you want to keep this ratio at or below 30 percent for the highest possible score.
Be Careful with Retirement Loans
Finally, one other interesting tidbit that came out of the Kavanaugh news was that he’d taken out a loan from his retirement savings. While this option does have some benefits – namely it doesn’t impact your credit score and interest rates are generally much lower than credit cards – it does have some disadvantages as well. For instance, there are potential tax penalties, it could cause debt to snowball if you’re not careful and, arguably most importantly, it can put a dent into your retirement savings, even temporarily. Most financial planners advise their clients to consider other debt management or payment options and treating a 401K loan as more of a last resort. However, it is an option.
Like we said in the opening, we’re not here to bag on Brett Kavanaugh for his financial spending habits. We just thought the news that came about regarding his credit card debt would make for an interesting case study on how the average American should ideally approach spending habits and debt management.
Kavanaugh didn’t report any debt in 2017, which indicates that he’s navigated the waters himself. Now he can get on to other important things, like a looming hearing where he can face Congress and make his case on why he’s an ideal fit for the highest court in the United States.
Regards,
Ethan Warrick
Editor
Wealth Authority
