All of the new and upcoming technological advances in the financial industry have gone a long way toward changing our society into more of a cash-less society. The bottom line is that many consumers are turning away from using cash and using credit or prepaid debit cards to make purchases. Even minor things, like getting coffee every morning, are winding up on some peoples’ credit cards, and the result is consumer debt accruing like never before.
Credit Card Debt is on the Rise
The United States is just starting to get back to a place of relative financial stability. After the last Great Recession, you would have thought that people would have learned their lessons about avoiding debt when it is at all possible. That doesn’t appear to be happening, though, as credit card use is rebounding, with the Federal Reserve announcing that Americans owe in excess of $880 billion dollars in revolving credit as of this past October.
All that debt is great news for the big credit card companies, but it’s not necessarily good news for the average consumer. As those big credit card companies continue to rack up profits like never before, all of that excess debt can leave the average person scrambling to make payments on time and can actually lead to people suffering from lower credit scores than they ought to have.
How do you compare?
A recent study by Credit Karma revealed that about half of its 30 million online members have credit card balances that equal 40 percent or more of their credit limit. That is not good news, since the big credit bureaus are known to penalize consumers when their credit card balances go above 30 percent of the credit card limit.
So what are the penalties that get handed out? Lower Credit Scores! And once someone has a lower credit score, higher interest rates are soon to follow. Those higher interest rates can wind up costing the average consumer thousands of dollars over the years. Even worse is the fact that lower credit scores can lead to people getting denied mortgage loans, auto loans and even jobs or better insurance rates.
How much of an impact can a lower credit score have on your finances in the future? Let’s say you were borrowing around 165 grand to buy a house. With a 4.5 percent interest rate you would wind up paying over 130K over the life of a traditional 30 year mortgage. But if you had a lower credit score that resulted in you paying 5 percent interest instead you’d wind up paying over 150K on the same loan. Just a half point difference means that you’d wind up paying nearly $18,000 dollars more than you would have if your credit score was higher…
That extra almost $18,000 could have been invested in your savings for retirement, used to purchase a new vehicle or even used as college tuition for your kids, instead of getting that extra money, though, too many Americans are simply racking up the credit card debt like never before…
Here’s what everyone needs to do if possible. Pay off high interest credit cards as quickly as possible or negotiate with the credit card companies to get lower interest rates. And never, ever allow your credit card debt to exceed 30 percent of your credit limit on any card. Finally, pay cash or use prepaid debit cards to pay for things instead of putting them on the credit card. Small purchases add up to bigger payments and more debt that most of us simply don’t have the financial wherewithal to deal with over the long haul.