The New Importance of Credit Card Debt Reduction

Posted by Chris Blanchet

August 28, 2009

by Chris Blanchet

Credit card debt reduction has taken on added importance lately. The reason? The average rates paid on credit cards has been edging upward since the beginning of this year. What does this mean for credit card borrowers is that there are greater risks. Here, we will explore three of the reasons for upgrading credit card debt reduction to the top of your To-Do list.

Higher Rates Cost More

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

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.

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.

About the Author:

With more than 16 years of experience in the financial services industry, Chris has helped thousands of people with debt management strategies. He maintains a regularly updated blog at How To Repay Debt.com.

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