Credit card debt; how it hurts you and how to get out from under it.
Total up the credit card debt of all the people in Utah in the second quarter of 2021, and it gives each household a staggering balance of $8,416, according to the Federal Reserve, Transunion, and the US Census Bureau. This is just barely below the National Average of $8,621. Covid brought the national average of credit card debt down, but now that the nation is getting back to normal, the credit card debt is going right back up.
Yes, this debt level is staggering. It can be the biggest enemy of people who is trying to build wealth. Let’s look at some of the credit card debt costs and what you can do about it.
The financing costs are high.
In September 2021, the average APR on a credit card was about 16.22%. That means, before considering potential late fees and other expenses, the “debt service” cost on the average household’s debt is $1398 a year. That’s the amount the debt will grow, assuming that no other spending on the cards takes place. If you have a complicated credit history, your interest rate could be as high as 22%. Your debt service then grows to $1896.
As your credit card statement is legally required to inform you, the debt service costs exceed the minimum payment. This cost will continue to grow forever, even if you never spend again. Interest rates, though, are only the tip of the iceberg.
Credit card companies also stack late fees, collection fees, and other miscellaneous charges on top of these fees. These fees then contribute to the debt load and are charged interest at the same rate. Carrying long-term and high amounts of credit card debt is among the worst things you can do for your financial health.
The hidden costs are high.
One of the most significant factors in determining your credit score is a figure called your “debt utilization ratio.” This ratio is the percentage of your available credit that you’re currently using. For example, say you have a credit limit of $5,000, and you carry a balance of $2,500. That means your debt utilization ratio is 50%. Anything higher than 30% can negatively impact your credit score, making it more challenging to get other kinds of credit (such as an auto loan or home mortgage).
It doesn’t stop there, though. That lower credit score also translates into higher interest for unsecured loans, like credit cards. This increase in cost eats up your credit limit faster, driving your credit score down, and contributing to even more debt.
Not only does it hurt you financially, but many employers now use credit checking as a way to assess the trustworthiness and long-term planning of a potential employee. Having a low credit score could cost you a chance at your dream job.
The investment opportunity is tremendous.
Savvy investors always like to talk about “ROI,” or return on investment. That’s the percentage of the money they invest that they get back and the rate they get it. Perhaps the shrewdest investor of our time, Warren Buffett gets an average return on investment of 17% for his investment company. This rate is the best work that the best investors in America can hope to achieve. They have to hunt long and hard for places to earn that kind of return.
If the interest rates on your credit card debt are right around 17%. So getting rid of your credit card debt can achieve those kinds of returns by saving you an extra 17% on every dollar you pay down. It’s the wisest investment decision you can make.
Your credit union can help.
Most habitual credit card users fall into a trap. They charge a great deal to one card, then sign up for another to take advantage of low-interest rates on balance transfers. They carry this massive ball of revolving debt with them and don’t see much of a way out.
Fortunately, your credit union is here to help you get out of the crushing cycle of revolving credit card debt. You can get a debt consolidation loan to help repair your credit score, consolidate your monthly bills into one payment and make that debt cheaper with a lower interest rate. Here’s how they work:
- You agree to a term of repayment, usually 60 months, and an interest rate.
- Your credit union issues you a loan for your credit card balance. You then pay them the same fee every month for those five years until your debt is gone.
- You walk away with an improved financial history and no debt.
Congratulations, you are now ready to start saving and investing in your financial future.
Debt consolidation loans aren’t the silver bullet to your financial problems. Instead, they work in conjunction with budget counseling, financial education, and credit help to get you on the path to financial well-being. It’s time to take control of your financial future. Stop by Elevate Credit Union today to discuss a debt consolidation loan.
