Warren Buffett, nicknamed the Oracle of Omaha, is possibly the greatest investor the world has ever seen. Once during a CNBC interview , Mr. Buffett mentioned that he could never make money if he borrowed at high interest rates. Mr. Buffett excels at capital allocation. It’s his profession and he is very, very good at it. This brings a very important question to mind. If Warren Buffett, a man (when I last checked) whose net worth is around $37 billion, says that he can’t benefit from borrowing money at high interest rates (for example 15%, - 30%), then how can an average, everyday Joe such as you and I benefit from borrowing money from a credit card that charges us 20%?

The answer is we can’t.

Let’s explore this a little further. Let’s assume that you have $20,000 in credit card debt and an annual interest rate of 20%. Usually, a creditor will have around a 2% minimum monthly payment on the account. This could result in the following situation:

Monthly Minimum Payments = $400
Monthly Interest Payments = $333.34

At a 20% interest rate, you’ll be charged around $4,000 in interest for the first year alone! Let’s look at this from another angle. What was that $20,000 spent on? Do you think it was used to buy items that will appreciate in value? Probably not. Even if the funds were used to make purchases on items that may appreciate in value, do you think those items will all appreciate at 20%? Once again, probably not.

Unless you are temporarily borrowing funds at these high interest rates, then it should be avoided all together. By “temporarily” I mean paying back the debt in a matter of a few months or so. Making the monthly minimums in this scenario just doesn’t cut it. If you should find yourself with excessive credit card debt, extremely high interest rates, and payments that you can no longer afford, debt settlement may be the right choice for you.