Over the past few months, credit card debt reduction has become a lot more prevalent to today’s consumer. Why? Not only has government made this a priority, but with rates increasing steadily month-to-month, borrowers recognize that there are some heightened risks to carrying debt this way. In this brief article, we will look at three of those risks, which should help us better understanding why credit card debt reduction needs to be a top priority.
Higher Rates Mean Higher Costs
When we pay more for credit, we have less left over at the end of the month. Whether this amount directly impacts the minimum payment required or ends up eating up any principal payment, we end up “paying” for it all the same. Higher interest costs, especially when compounded or added up over more than a couple of months, reduces our ability to save for a rainy day and weather periods of reduced income or job loss. For this reason alone, credit card debt reduction is something we should all focus on.
Higher Rates Hurt Credit Scores
By bumping rates, even gradually, card lenders make the debt repayment process a lot slower. Consider that a 1% increase on a $10,000 balance translates into an extra $100 in interest, or 1/3 of most minimum payments. This means that Utilization (the amount of credit outstanding compared to what it is available) remains high. With Utilization contributing more than 1/3 of the FICO score, it makes credit card debt reduction even more urgent…
Risk of Delinquency Increases as Rates Increase
When you consider that many people are losing income right now, credit card debt reduction itself becomes difficult at best. However, when you bump rates, you make it even more difficult for regular folks to make ends meet and, consequently, delinquencies arise. The difference now is that the “delinquent” amounts are higher because interest has been capitalized, allowing balances to get out of control a lot of faster.
Without question, credit card debt reduction has not only gotten the attention of individuals, but the government as well. The risks to higher rates are fairly evident and including reduced cash flow for the borrower, possible damage to credit scores, and higher probability of default.
When borrowers make credit card debt reduction a priority, they are preparing themselves financially for additional turbulence in the interest-rate environment. And with rates rising at a pace of 1% every three-months (which could put the average card rate at 16% by year-end), this strategy is not only prudent but wise.
Higher Rates Mean Higher Costs
When we pay more for credit, we have less left over at the end of the month. Whether this amount directly impacts the minimum payment required or ends up eating up any principal payment, we end up “paying” for it all the same. Higher interest costs, especially when compounded or added up over more than a couple of months, reduces our ability to save for a rainy day and weather periods of reduced income or job loss. For this reason alone, credit card debt reduction is something we should all focus on.
Higher Rates Hurt Credit Scores
By bumping rates, even gradually, card lenders make the debt repayment process a lot slower. Consider that a 1% increase on a $10,000 balance translates into an extra $100 in interest, or 1/3 of most minimum payments. This means that Utilization (the amount of credit outstanding compared to what it is available) remains high. With Utilization contributing more than 1/3 of the FICO score, it makes credit card debt reduction even more urgent…
Risk of Delinquency Increases as Rates Increase
When you consider that many people are losing income right now, credit card debt reduction itself becomes difficult at best. However, when you bump rates, you make it even more difficult for regular folks to make ends meet and, consequently, delinquencies arise. The difference now is that the “delinquent” amounts are higher because interest has been capitalized, allowing balances to get out of control a lot of faster.
Without question, credit card debt reduction has not only gotten the attention of individuals, but the government as well. The risks to higher rates are fairly evident and including reduced cash flow for the borrower, possible damage to credit scores, and higher probability of default.
When borrowers make credit card debt reduction a priority, they are preparing themselves financially for additional turbulence in the interest-rate environment. And with rates rising at a pace of 1% every three-months (which could put the average card rate at 16% by year-end), this strategy is not only prudent but wise.
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