A debt milestone of a colossal scale has finally been reached by American consumers, and the impact on their credit scores and their ability to achieve their financial dreams could make it all the more significant.
This summer, American consumers bought coffee, clothes, and online purchases to a point where our collective credit card debt now totals more than $1 trillion.
To put that in perspective, the cost to put American astronauts on the moon was only about $120 billion in current dollars. Our annual U.S. foreign aid programs amount to only $50 billion a year, according to the Council on Foreign Relations.
Amazingly, only our collective U.S. student loan obligations – some $1.4 trillion – serves to put credit card debt in perspective.
A Bigger Impact for Consumers
But unlike student loan debt, which still plays a small but significant role in personal credit scores, the world of personal, revolving credit card debt has a much more immediate impact, and can often serve to be the biggest factor in raising or lowering an individual’s credit score.
The $1 trillion mark, which now tops previous record consumer credit card debt levels from 2008, just before the long-term economic downturn of the Great Recession, equates to about $9,600 in debt per household.
Based on average incomes, that accounts for about 17 percent of most folks’ overall take-home pay. And as a result, more people find themselves merely paying the monthly minimum on the ever-growing balances on their cards, meaning that many people are paying an average of $1,200 to $1,300 a year in interest alone.
Add to that the steep fees now charged for late payments – which average $37 on most credit cards – and you have a gigantic and challenging debt burden that hangs over most people’s heads, complicated even further by our slightly outrageous student loan obligations.
If there’s any good news, overall credit card defaults are at just 2.3 percent, versus the alarming 6.8 percent of credit card users who simply walked away or were totally unable to pay their credit card obligations during the height of the recent financial chaos.
What Credit Card Debt Means to Your Credit Score
All of this is particularly important as those credit card balances so directly impact our credit scores. The three national credit bureaus (Experian, Equifax and TransUnion) collect and analyze and generate their own credit scores based on our credit behaviors, and credit card usage is a vital factor.
Creditors use what is called a debt utilization ratio to determine how much of a customer’s potential credit is in use at one time. Generally, anything above 30% of a card’s maximum is considered too much debt, even if you are making regular payments to cut down on the amount.
Racking up the balances on a single card can be bad enough for our credit scores, but when that load is applied to multiple cards – and factored into your overall credit load, which includes car loans, personal lines of credit and those ever-present student loans – the impact of a large balance can be even more critical.
The timeliness of payments toward your balance is also a massive factor in building and maintaining your credit score. The credit bureaus track on-time (and late) payments and use that information to form approximately 35 percent of your overall credit score.
That means that just one or two late payments can have a huge impact on your numbers. For some consumers, that might mean that a card automatically raises your interest rate, not to mention tacking on the late payment fees.
And low or lowered credit scores can also spell bad news when it comes to other non-credit-card-related necessities, such as the ability to rent an apartment, score an attractive monthly payment for a new car or open other lines of credit when necessity arises.
Credit Management Tips
Given this new and potentially troubling milestone for credit card debt, what are the best strategies for managing your debt load and making sure that your credit card expenditures don’t result in even bigger credit issues?
Most importantly, remember to make your payments on time – even if they’re just the minimum. Consider setting up automatic recurring payments on a credit card’s website or through a mobile app, or by arranging an automatic bill payment through your bank.
It takes a bit of diligence, especially if you’re one of the many consumers who carries balances on multiple cards, but timely payments (and, of course, money in the bank to make those automatic payments in the first place) is your most important mission in keeping up on your obligations.
Handling your overall credit balances is an equally challenging step. Try to keep that 30 percent utilization rate in mind and, in the absence of making significant cash payments to drop your balances, consider some other strategies.
Many expert consumers, especially those with spotless credit records, are able to spread that load around and get more attractive zero percent interest deals or even travel or incentive point bonuses by taking advantage of balance transfer programs with their various cards.
Do keep in mind that any new credit card application will also raise alarm bells on your credit report, and that you should keep new applications to a minimum as a result.
Budgeting your credit card usage is also a key strategy in keeping balances low and also building your credit score. To that end, using a debit card to make all those daily credit card-styled transactions can be helpful in resisting the urge to spend money you don’t really have.
If you’re additionally motivated by all of this to keep an eye on your own credit score, we can provide professional advice and the services to help improve things, as well.