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
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
Now that credit scores are more important than ever, it becomes increasingly important to make credit card debt reduction a part of our personal finances strategy. By charging higher rates, lenders are making it more difficult for borrowers to reduce their balance owing, resulting in higher “utilization.” With utilization accounting for more than 30% of the FICO score, it makes it imperative to keep usage low.
Higher Rates Can Increase Delinquencies
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.
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.
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.
