Why Reducing Credit Card Debt Now Is So Important

Struggling credit card companies are raising fees and rates and slashing credit limits not just on consumers that have been having difficulties in meeting their debt obligations, but also on those that pay on time and have good records. Many consumers find the cost of credit skyrocketing and see the actions of credit card companies having a negative impact on their credit scores, affecting other aspects of their financial lives. Paying down credit card debt is a smart financial move on many fronts.

Credit Card Companies’ Problems Become Consumers’ Problems

In this era of overall economic malaise and tightening regulations, credit card companies face a variety of challenges. As with any profit making industry, credit card companies are not going to simply absorb the losses that these circumstances may bring. Instead, credit card companies are going to do their best to recoup their losses and regain increases in their costs of doing business via the consumer, in effect making their problems the consumers’ problems.

On June 24, 2009, the Wall Street Journal reported that “the annualized credit-card charge-off rate broke through 10% during May, according to Moody's Investors Service, the first time in the more than two decades the credit ratings company has tracked the measure. Also, the measure of credit-card loans deemed uncollectible [sic] as a percentage of loans outstanding hit a fresh high for the sixth-consecutive month, rising to 10.62% in May on an annual basis from 9.97% in April and 6.41% a year earlier.” Furthermore, citing data from Moody’s and other sources, the article indicated that these numbers are expected to continue their upward trend for at least the next year.

Another problem credit card companies face is the consumer protection legislation recently signed into law by President Obama, which among other things, restricts their ability to raise interest rates. In response to the potential revenue reductions that the new regulations may cause, as well as to the increased losses brought about by the troubled economy and its affects on consumers and their ability to make their credit card payments, as well as the general reduction in consumer spending that the struggling economy has helped to bring about, credit card companies are making changes.

In a July 2, 2009, article, the Washington Post reported that “credit card companies are raising interest rates and fees seven months before new rules go into effect that will limit their ability to do so, much to the irritation of Congress and consumer advocates.” Some credit card issuers, such as Chase, are more than doubling the minimum payment due each month for some of its customers. According to an Associated Press report published by Philly.com on July 1, 2009, some Citi card holders have seen their interest rates bounce up to 29.99 percent, and most of the major credit card companies are busy slashing credit limits and increasing their fees and rates.

This harms consumers not just by increasing the amount of money they are obligated to pay monthly, but also by damaging their credit scores. That is because a key element of determining a FICO score, as noted in a June 30, 2009, Bloomberg.com story, is the “utilization rate” or “debt relative to available funds.” If a person has a credit limit of $20,000 and has $5000 in credit card debt, and then has their limit cut to $7,000, their standing looks much worse by the numbers, even though the actual amount of the debt did not change. Many people are experiencing this exact scenario, even those making on time payments and consistently paying more than their monthly minimum, and are having to deal with lower credit scores.

Credit scores affect a broad range of things, many well beyond the directly financial. In addition to determining the availability and cost of credit, credit scores can affect insurance rates, employment opportunities, whether a potential landlord will rent to you, and much more. Because of this, and the problems in the credit scoring system made apparent by consumers with good credit histories seeing their credit scores drop because of actions on the part of credit card companies that are not related to how the consumer handles his finances, lawmakers are taking a closer look. Congressman Luis Gutierrez, according to the Bloomberg.com article, “said he’s planning a subcommittee hearing on credit scores before the end of the year.”

Take A Pro-Active Approach To Reducing Credit Card Debt

In light of such circumstances, the best thing that the consumer can do is to take active steps to reduce credit card debt as quickly as they financially can. That is a good move anyway, because credit card debt is typically higher interest than other types of debt. That is why so many people consider a debt consolidation loan when faced with high interest credit card debt. However, while that is an effective strategy for many, it is not the only credit card debt reduction or elimination option to choose from.

Revamping the household budget with a strong focus on debt reduction can make a serious dent in credit card debt for some. Thoughtless spending – the drive-thru, the coffee on the way to work, snack foods while at the park with the kids – can really add up. With a solid and well thought out spending plan, that nonessential spending can be redirected towards paying down debt.

Many people choose credit counseling as a means of helping to reduce credit card debt. However, many experts say that most people can do what credit counselors do on their own. And, according to a June 15, 2009, New York Times article, it is becoming easier than ever before for the average consumer to negotiate on his own behalf with credit card companies, because “many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers.” These “deals” are increasingly including significant reductions in the principal, not just the reduction of interest and fees. Don’t be afraid to ask, you just may be surprised by how willing your credit card company is to help you to eliminate credit card debt.

Don’t let credit card companies make their problems your problems. If you are carrying credit card debt, now is the time to really focus on reducing that debt until you have completely eliminated it. You cannot count on being treated well by your credit card company even if you have an excellent history and consistently make more than your monthly minimum payment. Consumers throughout the nation are seeing their credit scores drop as their credit limits are reduced and many are seeing interest rate hikes, despite their good records. Paying down credit card debt is more important to your financial health now than it has been in decades.