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

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 Hurt Credit Scores

By bumping rates, even gradually, card lenders make the debt repayment process a lot slower. Consider that a 1% increase on a $10,000 balance translates into an extra $100 in interest, or 1/3 of most minimum payments. This means that Utilization (the amount of credit outstanding compared to what it is available) remains high. With Utilization contributing more than 1/3 of the FICO score, it makes credit card debt reduction even more urgent…

Higher Rates Can Increase Delinquencies

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.

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.

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