The New Importance of Credit Card Debt Reduction
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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.
The Costs Of Higher Rates Hurt
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 Slow The Debt Repayment Process
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 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.
Evidently, credit card debt reduction has become a priority among individuals and government alike. The risks to the borrower are obvious, starting with reduced cash flow that will impact people’s ability to save; potential damage to credit scores which can sometimes last up to seven years; and higher delinquencies.
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.
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