Are Consumers Paying Off Credit Card Debt?
An interesting possibility emerged from last week's first quarter earnings reports when two of the largest institutions that issue credit cards reported that outstanding credit card loans actually decreased. At JP Morgan Chase, loans dropped 6%, and at Citigroup the decline was 4%. Both institutions say rising payment rates by cardholders are the reason for the declining balances.
"The possibility of a trend of declining balances is a bit of a surprise since we have grown accustomed to statistics that have shown increasing credit debt. However, increasing debt balances can't go on forever without serious consequences for household finances and the national economy," says Bill Hardekopf, CEO of Lowcards.com. "While increasing balances have been profitable for credit card companies, interest rates are now too high for consumers to carry credit card debt and financially survive or save even a small amount of money. Years of low interest rates hooked many households on credit cards. Now is the time to kick the dependency before getting behind on payments."
One of the reasons for declining balances is the recent higher minimum payment guidelines--most cards increased from 2% to 4% of the balance due. "The increased minimum payment guidelines were created to help consumers get out of debt faster and it looks like this is helping," says Hardekopf. "Another factor is interest rates--they are now at a five-year high and carrying debt is getting expensive. We are no longer at the period where low interest rates allow us to buy things today that
we can't afford by just putting them on the credit card and paying a relatively low interest rate. Rising interest rates, gas prices and utility bills should force households to closely watch their budget. Paying off credit cards is one area that households can control and keep more of their own money. In a time of rising rates and prices, this is absolutely the time to pay off your debt and get your finances on stable ground."
Tips for Paying Off Credit Cards.
1. The first step is tracking your money--where does it go each month? If you have never examined your spending, it is easy to blindly assume that every purchase you make is a necessity. Divide expenses into essential and non-essential (not all expenses are essential). "For one month, write down each purchase, including snacks and lunches out, treats for kids and any late fees. It will take a commitment, but you will probably be surprised to find spending that you can cut out and probably not miss," says Hardekopf.
2. Scrutinize your grocery bill--this is one of the largest items in most budgets and it is an area where you probably have the most opportunities to cut back. Shop from a grocery list of necessities. Expenses for eating out and entertainment are also good places to start cutting back. "It may be hard to sacrifice enjoyment today, but they will be a great reward when you are debt-free and able to afford them," says Hardekopf.
3. Call and ask for a lower rate for each credit card you have. If they don't lower it the first time, build a good payment history and call every few months. A lower rate will help accelerate paying down the balances.
4. Apply the money saved form cutting expenses and lowering rates to pay down the balances on your credit cards. Give yourself an easy first goal by paying off the smallest credit card first. When that is paid off, roll over the savings and payment to the next card until it is paid off.
5. If you have a variety of debts, such as student loans, auto and credit cards, don't try to pay them all down at once. Start with credit cards first to get rid of your debt with highest interest rates. Then pay off your auto loan.
6. Stop using your credit card until you pay off your balances. Take the attitude that if you can't pay for the item today with cash, then you don't need it.
7. Don't pay for everyday items or meals with your credit card if you carry a balance. It makes no sense to pay high interest rates on an item long after you have forgotten about it.
8. If it will take more than three years to pay down most of your debt, and cutting expenses won't realistically help you pay off your debt, contact a reputable debt counselor.
9. If you can realistically pay off your balance in one year, then consider a card with a 0% intro rate for 12 months. Before you submit an application and your balances from other cards, have a reasonable expectation of what your new credit card limit will be. The credit limit will determine how much you can transfer. If the limit for your other cards is $5,000 and your credit score has
remained the same, your new limit will not be dramatically higher. If you do not know what your credit limit will be, apply for a card that will give you time to transfer your balance without paying fees. You may not qualify for the advertised intro rate. If you have a late payment, your APR will jump to a much higher rate
Even though changing spending habits to pay down debt sounds difficult, paying just a little more makes a big difference. A $5,100 balance with a 15% APR and a $204 minimum payment will take 139 months to pay off and cost $2,256.21 in interest. Pay $50 more per month and the card will be paid off in 24 months with $809.32 in interest.
"While we can make suggestions to encourage cardholders to pay off their credit card balances, I wouldn't be surprised to see the credit card companies make moves to protect their own bottom line. They can continue to increase rates and fees or adjust fee tiers to increase revenue. They can also add annual fees on reward cards to get some sort of revenue from those who pay off their balance each month."
"The possibility of a trend of declining balances is a bit of a surprise since we have grown accustomed to statistics that have shown increasing credit debt. However, increasing debt balances can't go on forever without serious consequences for household finances and the national economy," says Bill Hardekopf, CEO of Lowcards.com. "While increasing balances have been profitable for credit card companies, interest rates are now too high for consumers to carry credit card debt and financially survive or save even a small amount of money. Years of low interest rates hooked many households on credit cards. Now is the time to kick the dependency before getting behind on payments."
One of the reasons for declining balances is the recent higher minimum payment guidelines--most cards increased from 2% to 4% of the balance due. "The increased minimum payment guidelines were created to help consumers get out of debt faster and it looks like this is helping," says Hardekopf. "Another factor is interest rates--they are now at a five-year high and carrying debt is getting expensive. We are no longer at the period where low interest rates allow us to buy things today that
we can't afford by just putting them on the credit card and paying a relatively low interest rate. Rising interest rates, gas prices and utility bills should force households to closely watch their budget. Paying off credit cards is one area that households can control and keep more of their own money. In a time of rising rates and prices, this is absolutely the time to pay off your debt and get your finances on stable ground."
Tips for Paying Off Credit Cards.
1. The first step is tracking your money--where does it go each month? If you have never examined your spending, it is easy to blindly assume that every purchase you make is a necessity. Divide expenses into essential and non-essential (not all expenses are essential). "For one month, write down each purchase, including snacks and lunches out, treats for kids and any late fees. It will take a commitment, but you will probably be surprised to find spending that you can cut out and probably not miss," says Hardekopf.
2. Scrutinize your grocery bill--this is one of the largest items in most budgets and it is an area where you probably have the most opportunities to cut back. Shop from a grocery list of necessities. Expenses for eating out and entertainment are also good places to start cutting back. "It may be hard to sacrifice enjoyment today, but they will be a great reward when you are debt-free and able to afford them," says Hardekopf.
3. Call and ask for a lower rate for each credit card you have. If they don't lower it the first time, build a good payment history and call every few months. A lower rate will help accelerate paying down the balances.
4. Apply the money saved form cutting expenses and lowering rates to pay down the balances on your credit cards. Give yourself an easy first goal by paying off the smallest credit card first. When that is paid off, roll over the savings and payment to the next card until it is paid off.
5. If you have a variety of debts, such as student loans, auto and credit cards, don't try to pay them all down at once. Start with credit cards first to get rid of your debt with highest interest rates. Then pay off your auto loan.
6. Stop using your credit card until you pay off your balances. Take the attitude that if you can't pay for the item today with cash, then you don't need it.
7. Don't pay for everyday items or meals with your credit card if you carry a balance. It makes no sense to pay high interest rates on an item long after you have forgotten about it.
8. If it will take more than three years to pay down most of your debt, and cutting expenses won't realistically help you pay off your debt, contact a reputable debt counselor.
9. If you can realistically pay off your balance in one year, then consider a card with a 0% intro rate for 12 months. Before you submit an application and your balances from other cards, have a reasonable expectation of what your new credit card limit will be. The credit limit will determine how much you can transfer. If the limit for your other cards is $5,000 and your credit score has
remained the same, your new limit will not be dramatically higher. If you do not know what your credit limit will be, apply for a card that will give you time to transfer your balance without paying fees. You may not qualify for the advertised intro rate. If you have a late payment, your APR will jump to a much higher rate
Even though changing spending habits to pay down debt sounds difficult, paying just a little more makes a big difference. A $5,100 balance with a 15% APR and a $204 minimum payment will take 139 months to pay off and cost $2,256.21 in interest. Pay $50 more per month and the card will be paid off in 24 months with $809.32 in interest.
"While we can make suggestions to encourage cardholders to pay off their credit card balances, I wouldn't be surprised to see the credit card companies make moves to protect their own bottom line. They can continue to increase rates and fees or adjust fee tiers to increase revenue. They can also add annual fees on reward cards to get some sort of revenue from those who pay off their balance each month."
