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.
The Costs Of Higher Rates Hurt
By paying higher rates on cards, borrowers are obviously wasting more money. It may seem like peanuts over the course of any given month, but over the course of a year or even compounding that potential growth gives a more accurate picture. Debtors realize that the more debt they carry at higher rates actually impedes their ability to save for a rainy day, something that has become a little more important with so many people out of work. By taking a strong credit card debt reduction strategy, people will improve cash flow and manage to save a little more.
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.
Higher Rates Can Increase Delinquencies
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.
Not only has credit card debt reduction become more important to individuals, but to the government as well. Sadly, the risks of higher interest can have a damaging impact on the economy, starting with the consumer who will experience reduced cash flow now that they are paying more in interest; possible damage to credit scores now that utilization remains high; and finally, higher probability of default which can have deeper consequences than those of a purely financial nature.
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.
Related posts:
