Everything is growing these days. as well as loans and some of them, like credit cards, are the most expensiveHaving a strategy to eliminate them should be a priority in personal or family finances right now.
The New York Federal Reserve Center for Studies, in its report for the second quarter of the year, calculated that Americans owed $16.15 trillion, up 2% from the first quarter of the year.
In total, there are two trillion dollars more in circulation at the end of 2019 than before the pandemic.
To a large extent, the increase is “due to higher prices,” as the Federal Reserve noted on its blog. In fact, the effects of inflation are being felt in credit card balances which increased by $46,000 million in the quarter, the largest increase since 1999 and coincided with the sharp reduction in mortgage refinancing with which many family funders charge.
For the moment, there are no signs of delinquency, but the weight of this debt is enormous, especially in an environment of rising interest rates.
“It sounds obvious and easier said than done, but you need to pay off your card debt ASAP”Recommends Ted Rossman, Principal Analyst at Bankrate.com. “There are a lot of trends converging: rising interest rates, rising inflation and more debt on the cards, something that’s hard to get out of.”
interest more expensive than fees
Rossman explains that Rising interest rates show how expensive this loan is. At Bankrate, they calculate that the average rate on card balances is 17.35% and according to credit agency TransUnion, the average balance is $5,010. “If only the minimum payment is made with these parameters, the loan will be for 187 months (over 15 years) and $5,924 will be paid in interest only. This is more than the initial loan costs themselves.
Every increase in interest rates increases the timing of monthly interest charges, which Rossman calls “brutal” math.
Its purpose is to reset the balance to zero. It is a difficult task, but some tools can be considered and used at the same time.
Card balance transfers which are usually offered by banks to attract new customers and have 0% APR (interest) for up to 21 months.
Card debt consolidation with personal loans that can currently be 6% (significantly lower than the fees charged by card issuers) for six years.
Advice and planning from advisors from non-profit organizations such as Money Management International.
In case of balance transfer, you should have a commission which can be 3% or 5%. However, the possibility of non-payment of interest generally compensates if this card is not used to add a new loan, since simple interest is normally charged on it, which also defeats the purpose of the set of deductions. given.
Opening a new card may hurt your credit score a bit more for a while, but if you don’t have a line of credit, a high balance can lower it a bit more. Remember that it is advisable to use 30% of the credit line so as not to hurt the score.
Rossman explains that the bank recognizes that this is a marketing strategy to attract new customers and that it is known that half of the transferred balance is not paid within the stipulated time, so customers will be billed for this loophole in the tariffs. facing growth again. This discount rate analyst gives advice Divide the balance by the given number of months and attempt to pay the resulting amount Or at least the closest to it on an ongoing basis to avoid reaching the end of the offer with a loan. You never get out of a hole with a minimum monthly payment.
It’s not out of the question, although it shouldn’t be a habit, to do another balance transfer if you get the chance. Some banks offer this to certain customers and not just new customers.
Although this first strategy is the most appropriate because it is practically free, in the event of large or non-repayable debts on time, the personal loan is an option to consider, although the interest rate will depend on the credit rating.
Nonprofit counseling is one of Rossman’s best outlets because it offers similar terms to personal loans, doesn’t require a great credit score, and offers assistance during the process. Of course, the card must be deactivated as a bet.
Prioritize, repay a debt or save?
The Federal Reserve will raise interest rates to reduce inflation and keep the economy cool. The possibility of a recession is real and you need to prepare for it. Personal finance experts estimate that you will need to save around six months of living expenses. This is a very difficult goal and even more so if you also have expensive debts.
“You can’t save everything and have huge credit card debt because it’s too expensive, but you don’t want to use every dollar to pay back what you earn because you’re not in a good position to have savings.” and an unavoidable expense,” says Rossman. Faced with the dilemma of balancing or reducing savings, this expert says that an intermediate position is appropriate at this time and works both on the objectives simultaneously with the budget in which one seeks to save expenses, even temporarily .
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