Everything is growing these days. as well as loans and some of them, like 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, in its report for the second quarter of the year, calculated that Americans owed $16.15 trillion (trillion in English), up 2% from the first quarter of the year.
Overall, there are two trillion dollars more outstanding 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 felt in credit card balances that increased by $46,000 million in the quarter, the largest increase since 1999 and coincided with the strong reduction in mortgage refinancing with which many family financers bill.
As of now, there are no signs of delinquency, but the burden 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 as soon as possible”Recommends Ted Rossman, senior analyst at Bankrate.com. “There are a lot of trends that are converging: rising interest rates, higher inflation and more debt on cards, something that’s hard to get out of.”
interest more expensive than fees
Rossman explains that The rise in interest rates shows how expensive this loan is. At Bankrate, they calculate that the average rate on card balances is 17.35% and according to TransUnion Credit Agency, 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 fee itself.”
Each increase in interest rates increases the timing of monthly interest charges, which Rossman calls “brutal” math.
Its purpose is to zero the balance. It is a difficult task but there are some tools that can be considered and used at the same time.
-
Balance transfers in cards that are generally offered by banks to attract new customers and have an APR (interest) of 0% for a period that can reach up to 21 months.
-
Card debt consolidation with personal loans which can currently be 6% (significantly less than the fees charged by card issuers) for six years.
-
Advice and planning from advisors from non-profit organizations such as Money Management International.
check options
In case of balance transfer, you should have a commission charge which can be 3% or 5%. However, the possibility of non-payment of interest usually compensates if that card is not used to add a new loan, as simple interest is normally charged on it and this also defeats the purpose of the deduction set. gives.
Opening a new card can hurt your credit score a little more for a while, but if you don’t have a credit line, a high balance can lower it a little 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 acknowledges 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 given period, so customers will be charged that loophole in rates. again facing growth. This Bankrate Analyst Gives Advice Divide the balance by the given number of months and try to pay the resulting amount Or at least closest to it on an ongoing basis to avoid reaching the end of the offer with a loan. You never walk out of a hole with a minimum monthly payment.
It’s not out of the question, although it shouldn’t be a habit, do another balance transfer if given the chance. Some banks offer this to certain customers and not just new customers.
While this first strategy is the most appropriate as it is practically free, in case of heavy debt or cannot be repaid within the tenure, personal loan is an option to consider, though the interest rate will depend on the credit score.
Advice from nonprofits is one of the best outlets for Rossman because they offer terms similar to personal loans, don’t require a great credit score and offer assistance during the process. Of course, the card has to be turned off as a bet.
Prioritize, pay off debt or save?
The Federal Reserve is going to raise interest rates to reduce inflation and keep the economy cool. The possibility of a recession is real and you have to prepare for it. Personal finance experts estimate that you will have to save around six months of current expenses. This is a very difficult objective 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 off what you earn because you’re not in a good position to have any savings.” and an unavoidable expense,” explains Rossman. Faced with the dilemma of balancing or reducing savings, this expert says that an intermediate position is appropriate at this time and work on both the objectives simultaneously with the budget in which expenses are sought to be saved, even Even temporarily.
You may also be interested. on video
What is inflation and deflation? Practical Guide to Value for Your Money
