Everything goes up these days. Also debts and some of them, such as credit cards are the most expensive. Having a strategy to eliminate them should be a priority in personal or family finances right now.
The study center of the New York Federal Reserve has calculated in its report for the second quarter of the year that Americans owe $16.15 trillion (trillion in English), 2% more than in the first quarter of the year.
In total, two trillion dollars more are owed than at the end of 2019, before the pandemic.
To a large extent, the increase “is attributable to high prices,” as explained by the Federal Reserve itself on its blog. In fact, the effects of inflation are felt in the credit card balances that have increased by $46,000 million in the quarter, the largest increase since 1999 and coinciding with the strong reduction in mortgage refinancing with which many families finance bills.
At the moment, there are no signs of delinquency, but the weight of this debt is very high, especially in an environment of rising interest rates.
“It sounds obvious and easier said than done but you have to pay off your card debt as soon as possible”recommends Ted Rossman, senior analyst at Bankrate.com. “There are a lot of trends that are converging: rising interest rates, high inflation and more debt on cards, something that is difficult to get out of.”
The interest is more expensive than the charge
Rossman explains that the rise in interest rates highlights how expensive this debt is. At Bankrate, they calculate that the average rate charged on card balances is 17.35% and, according to the TransUnion credit agency, the average balance is $5,010. “If only the minimum payments are made with these parameters, there will be debt for 187 months (more than 15 years) and $5,924 will be paid only in interest. It is more than the initial debt charge itself.”
Each increase in interest rates increases the time of the monthly interest charge in what Rossman calls “brutal” mathematics.
The objective is to reduce balances to zero. It is a tough task but there are some tools that can be contemplated and used at the same time.
Balance transfers to cards that are normally offered to attract new customers by banks and that have an APR (interest) of 0% for a period of time that can reach 21 months.
Card debt consolidation with a personal loan that can currently be as low as 6% (significantly below those charged by card issuers) for six years.
Advice and planning from advisers to non-profit organizations such as Money Management International.
Examination of options
In the case of balance transfers, you must have a commission charge that can be 3% or 5%. However, the possibility of not paying interest usually compensates if that card is not used to add new debt, since normally the normal interest is applied to it and it also defeats the purpose of the reduction set.
Opening a new card can briefly and slightly hurt your credit score, but what can depress it a bit more is a high balance if your line of credit isn’t. Remember that it is advisable to use 30% of the credit line so as not to harm the score.
Rossman explains that the bank admits that this is a marketing strategy to attract new customers and that it is known that half of the balances that are transferred are not paid within the given term, so customers face increases again. of rates in that loophole. This Bankrate analyst advises divide the balance by the given months and try to pay the resulting amount or at least the closest to it on a constant basis to avoid reaching the end of the offer with debts. With the minimum to pay monthly you do not get out of the hole.
It is not out of the question, although it should not be a habit, to make a second balance transfer if the opportunity arises. Some banks offer it to some customers and not just new ones.
Although this first strategy is the most advisable since it is practically free, in case of a heavy debt or cannot be paid within the term, the personal loan is an alternative to consider, although the interest rate will depend on the credit score.
The advice of non-profit organizations is for Rossman one of the best outlets because they offer conditions similar to those of personal loans, a great credit score is not needed and help is offered during the process. Of course, the cards have to be closed, as a condition.
Priority, pay debt or save?
The Federal Reserve is going to keep raising interest rates and cooling the economy to bring down inflation. The possibility of a recession is real and you have to prepare for it. Experts in personal finance estimate that you have to have saved about six months of current expenses. It is a very difficult objective and more so if you also have expensive debts.
“You can’t save everything and have heavy credit card debt because it’s very expensive, but you don’t want to use every dollar you earn to pay off what you owe because you’re not in a good situation when there are no savings and an unavoidable expense arrives” Rossman explains. Faced with the dilemma of reducing balance or saving, this specialist says that at this time an intermediate position is advisable and act on both objectives simultaneously with a budget in which savings in expenses are sought, even temporarily.
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