Why Higher Card Rates Make Credit Card Debt Reduction a Priority
Surprisingly it is not solely because of the US Government's attention to interest rates that credit card debt reduction has become a greater blip on people's debt radar. In fact, the rising average costs associated with this type of debt has helped pique people's curiosity and has helped them become more focused than ever to make credit card debt reduction a top priority when it comes to dealing with consumer debt. Why? Because there are risks associated with this trend. Here, we look at three of those risks.
Higher Rates Cost More
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 Will Bring Down Credit Scores
When the card lenders increase rates, they essentially reduce the borrower's ability to repay the debt quickly. Why is this so important? Because the higher your balances, the lower your credit score. This is reflected in the Utilization aspect of the FICO score, which accounts for nearly 30% of the score. By making credit card debt reduction a priority, borrowers should aim to at least reduce their utilization to 75% or less.
Risk of Delinquency Increases as Rates Increase
As the unemployment rate remains higher and job losses are anticipated to continue, many people already have a tough-enough time making payments on their cards, let alone considering a credit card debt reduction strategy. Increasing card rates can nudge borderline borrowers into delinquency and thereby result in heightened stress at home and the potential for other long-term problems, many of which are not even financial-related.
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.
By making credit card debt reduction a priority now, borrowers will be better equipped to weather a worsening interest-rate climate. While higher rates might not seem like such a deal-breaker on a month-to-month basis, the trend has been that rates are rising at a pace of 1% every quarter, meaning the average card rate could reach 16% by the end of this year.
Higher Rates Cost More
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 Will Bring Down Credit Scores
When the card lenders increase rates, they essentially reduce the borrower's ability to repay the debt quickly. Why is this so important? Because the higher your balances, the lower your credit score. This is reflected in the Utilization aspect of the FICO score, which accounts for nearly 30% of the score. By making credit card debt reduction a priority, borrowers should aim to at least reduce their utilization to 75% or less.
Risk of Delinquency Increases as Rates Increase
As the unemployment rate remains higher and job losses are anticipated to continue, many people already have a tough-enough time making payments on their cards, let alone considering a credit card debt reduction strategy. Increasing card rates can nudge borderline borrowers into delinquency and thereby result in heightened stress at home and the potential for other long-term problems, many of which are not even financial-related.
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.
By making credit card debt reduction a priority now, borrowers will be better equipped to weather a worsening interest-rate climate. While higher rates might not seem like such a deal-breaker on a month-to-month basis, the trend has been that rates are rising at a pace of 1% every quarter, meaning the average card rate could reach 16% by the end of this year.
About the Author:
With more than 16 years of experience in the financial services industry, Chris has helped thousands of people with debt management strategies. He maintains a regularly updated blog at How To Repay Debt.com.