Job loss. Reduced income. A lingering recession. These are just some of the reasons why credit card debt reduction has been at the forefront of people’s minds. Even without these looming financial threats, looking at credit card debt reduction is a smart financial move. With rates on such credit being among the highest, folks really need to tackle this debt in order to become financially better off.
Exploring the interest rates further, it can be seen that the cost of borrowing this way has been increasing. The average card rate in May (three months ago) was 13.94% and today sits at 14.94%. Over that time period, rates have crept higher and higher, making credit card debt reduction more of a necessity now that the after thought it has been.
Rates are not the only reason why we should place added emphasis on credit card debt reduction. In fact, revolving credit cards are often what cause the greatest financial stress on FICO scores (or other credit scoring systems). To illustrate, consider that over 65% of your score will be based on two simple principles: utilization and repayment history.
Borrowers who do not make credit card debt reduction a priority will normally encounter problems when there is a personal financial setback, such as a reduction in income. When the balance hovers at or near (or even above) the card limit, borrowers will be penalized through their score for having high utilization. To compound matters, if the financial setback is a bad enough and a single minimum payment is missed, the score will suffer even more on account of late payments.
Nobody likes to look at the negative possibilities, even when we are trying to hedge against personal finance catastrophes. But we have to keep the facts in mind. One, card rates are going up (so much so that the Government is now involved and reviewing putting “caps” on rates). Two, we are living through a tough economic period. Three, credit scores are only becoming more and more popular with the lenders from whom we seek credit. We now have three undeniable reasons why credit card debt reduction should be at the forefront of our financial plans.
We have our own personal reasons for carrying debt on credit cards. Whether we are comfortable given a perceived job stability or we simply are not bothered by large debt, it does not matter. However, when it comes to dollars and cents (and most of care about that!) it is strongly recommended that we examine how credit card debt reduction can help us now and into the future, particularly as it relates to our financial well-being.
Chris has more than 16 years of financial services experience. He provides information about the First Time Home Buyer Mortgage at the Home Equity Loan Site.
