The New Importance of Credit Card Debt Reduction
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 Cost More
Perhaps the most obvious risk is that it will cost the average borrower more and more to service their debt. This may not seem like a lot from month-to-month, but with unemployment figures high, most of us realize that the more money we waste on interest, the worse off we are making ourselves financially. Hence credit card debt reduction will result in interest cost reduction, allowing us to save more instead of borrow more.
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…
Higher Rates Can Result In Higher Delinquency
With so many people out of work or about to have their income reduced, higher rates can result in higher payments when it may already be difficult to make those payments (and forget about credit card debt reduction altogether!). By bumping rates, card lenders could essentially push borderline borrowers into delinquency.
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.
Borrowers who make credit card debt reduction a priority are positioning themselves to withstand additional turbulence in card rates. This is quite likely a very safe and wise approach since average rates can easily reach 17% (from today’s average of 14.94%) by year end.
