Tightrope Walk with Credit Card Debt
Life with credit card debt can feel like walking a tightrope high above the ground, where an unexpected expense can push you over the edge. Alongside medical or family emergencies, people with high credit card debt need to consider how the possibility of an interest rate hike from the Federal Reserve can further affect their finances.
An associate at Nerdwallet.com cites that an interest rate increase of 1 percentage point would cost approximately $160 per year for a family with average household credit card debt. That works out to just over $13 dollars per month, which might not seem high. However, for people that are barely making minimum payments the additional cost can make it impossible for them to pay off their credit card debt in the future.
Data from the Federal Reserve cites the following:
- Total credit card debt in May was $901 billion
- Credit card debt was up 3.19 percent from May 2014
- In July the average balance for household consumer debt was $15,863
There is no doubt that consumers are spending more money on their credit cards than ever before. However, those who are not paying the monthly balance are living with high credit card debt. A survey conducted by Prosper (a peer-to-peer lending marketplace) finds that only 37.4 percent of people with credit cards pay their balance in full every month. The same survey finds that 15.9 percent only pay the monthly minimum. Everything from decrease in credit score to late fees for missed payments to higher stress levels can result from accumulating debt.
Technology has revolutionized how easily people can purchase consumer goods. From online shopping to credit cards that do not require entering a pin, it is no wonder that consumers have legendary debt levels. A large percentage of people are unaware of the interest rates charged by their credit cards and do not realize how long it will take to pay off balances. Just as consumers have become expert spenders, they need to be just as savvy when it comes to finding ways to reduce credit card debt.
Experts advise that consumers with high credit card debt should communicate with credit companies and ask them to reduce their interest rates or to waive late fees. Credit companies do not want people to default on their balances altogether and often work with customers to ensure payments are made. Another method in wiping out credit card debt is to take advantage of zero interest balance transfers. When consolidating credit card debt with a zero interest transfer, it is vital that consumers not use the card that had its balance transferred, or they will find themselves worse off than before. It is also important to note that zero interest transfers may disappear if the Federal Reserve increases interest rates.
It is not all doom and gloom when it comes to credit card debt. The National Foundation for Credit Counseling found that the percent of homes with credit card debt has been declining since 2009. There has also been an increase in the number of people paying their credit card balances in full. Ideally everyone wants to carry a zero balance every month, but for millions of households that is just not possible. Taking measures such as: cutting back on unnecessary expenses, dipping into savings, zero interest transfers and altering spending habits will all help drastically in lowering household debt levels. When debt reaches a manageable level, the available credit can be used for unseen emergencies and or expenses.
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