Job loss. Reduced income. A lingering recession. These are just some of the reasons why credit card debt reduction has been at the forefront of people’s minds. Even without these looming financial threats, looking at credit card debt reduction is a smart financial move. With rates on such credit being among the highest, folks really need to tackle this debt in order to become financially better off.

Taking a deeper look at interest rates, keep in mind that card rates have rising a full percentage point in the past 3 months (from 13.94% in May to 14.94% today). This means that credit card debt reduction is something we must now examine a lot more closely before rates rise farther and push us closer to insolvency.

Rising rates are not the only reason people should concern themselves with credit card debt repayment. Let’s look at credit scores. With revolving credit, people are more apt to see their scores tank because more than 65% of their FICO score is based on two major factors: utilization and repayment history.

When credit card debt reduction is not a priority, people will be more likely to use credit to the maximum available limit. This is often okay because the payments are low or the full balance is not high. However, if a reduction in income cripples the ability to repay, the credit score will suffer because utilization is high. If the financial strain is substantial and a payment is missed, the late payment will also reflect in the credit score, thereby punishing the borrower with a much lower score.

Nobody likes to look at the negative possibilities, even when we are trying to hedge against personal finance catastrophes. But we have to keep the facts in mind. One, card rates are going up (so much so that the Government is now involved and reviewing putting “caps” on rates). Two, we are living through a tough economic period. Three, credit scores are only becoming more and more popular with the lenders from whom we seek credit. We now have three undeniable reasons why credit card debt reduction should be at the forefront of our financial plans.

There are as many reasons why people carry debt as there is for why they do not. However, there is one universal feeling that all debtors and non-debtors share — that involves financial health and sustenance. With that in mind, it makes sense for people to look at credit card debt reduction now and not when it is too late.

Over the past few months, credit card debt reduction has become a lot more prevalent to today’s consumer. Why? Not only has government made this a priority, but with rates increasing steadily month-to-month, borrowers recognize that there are some heightened risks to carrying debt this way. In this brief article, we will look at three of those risks, which should help us better understanding why credit card debt reduction needs to be a top priority.

The Costs Of Higher Rates Hurt

By paying higher rates on cards, borrowers are obviously wasting more money. It may seem like peanuts over the course of any given month, but over the course of a year or even compounding that potential growth gives a more accurate picture. Debtors realize that the more debt they carry at higher rates actually impedes their ability to save for a rainy day, something that has become a little more important with so many people out of work. By taking a strong credit card debt reduction strategy, people will improve cash flow and manage to save a little more.

Higher Rates Slow The Debt Repayment Process

By bumping rates, even gradually, card lenders make the debt repayment process a lot slower. Consider that a 1% increase on a $10,000 balance translates into an extra $100 in interest, or 1/3 of most minimum payments. This means that Utilization (the amount of credit outstanding compared to what it is available) remains high. With Utilization contributing more than 1/3 of the FICO score, it makes credit card debt reduction even more urgent…

Risk of Delinquency Increases as Rates Increase

When you consider that many people are losing income right now, credit card debt reduction itself becomes difficult at best. However, when you bump rates, you make it even more difficult for regular folks to make ends meet and, consequently, delinquencies arise. The difference now is that the “delinquent” amounts are higher because interest has been capitalized, allowing balances to get out of control a lot of faster.

Evidently, credit card debt reduction has become a priority among individuals and government alike. The risks to the borrower are obvious, starting with reduced cash flow that will impact people’s ability to save; potential damage to credit scores which can sometimes last up to seven years; and higher delinquencies.

Borrowers who make credit card debt reduction a priority are positioning themselves to withstand additional turbulence in card rates. This is quite likely a very safe and wise approach since average rates can easily reach 17% (from today’s average of 14.94%) by year end.

When it comes to simplifying your finances, it often makes sense to sacrifice financial benefits in the short-term in order to reach longer term financial goals. With that in mind, we will discuss the top reasons to consolidate debt here and try to illustrate how some of the pitfalls can yield better long-term opportunities.

Simplification

As one of the top reasons to consolidate debt, simplicity is key. Bringing all of your debt (and debt payments) into a single debt with a single payment allows you to budget better for the balance of the month. The stress this alleviates now that you have only one payment instead of many cannot be underestimated. But…

The problem when it comes to simplicity is that consolidation loans often come at a higher cost. This could mean one or both of the following: a higher interest rate because consolidation loans are normally unsecured and obtained when credit is not at its optimal. The other is that you might have to give up your existing revolving credit, which you might have expected to use to finance a future emergency. So, as one of the top reasons to consolidate debt, simplicity might not seem like such a great “top reason” after all.

Debt Paid in Full at End of Term

Consolidation loans are normally granted on a term-loan basis. This means that after the five years or so, your original debt will have been paid in full. Without question, this is one of the top reasons to consolidate debt, especially if you find you are unable to make headway with existing debt on revolving credit.

Improved Future Cash Flow

As noted earlier, improving cash flow immediately is also one of the top reasons to consolidate debt (simplicity). However, borrowers often overlook the improved future cash flow, which means that while you are in the process of repaying the consolidation loan, once it is repaid, you can often spend only a fraction of the loan payment to “catch up” on missed opportunities. For example, if you simplify your cash flow by taking out a consolidation loan that will cost $400 every month, but must sacrifice your retirement savings of $200 per month for 5 years, you may be better off. In five years, even if you save just $340 of the available $400 for the next fifteen years, you would end up being in the exact same position financially as you would be if you continued saving $200 for twenty years starting today.

Naturally the three reasons above are just some of the top reasons to consolidate debt. Again, they are simplification of current cash flow, a guaranteed repayment of debt at the end of the loan term and a likely improvement to future cash flow and savings. There are some sacrifices to consolidating debt, though. Normally, this includes higher interest rates and a sacrifice of flexibility in terms of credit availability. Borrowers should always make sure they understand the terms of their consolidation loans and be 100% certain that it is the right financial move before signing on the dotted line.

There are times when just meeting your financial needs will leave you with a tremendous amount of debt. When it comes to repaying debt and properly managing your finances, you have plenty of options available to you. The best way to repay debt involves focusing almost exclusively on higher-rate debt and gradually working your way to lower-rate debts. Keep in mind that all debt need to be paid, but keeping the lower-rate debt to the minimum amount and channeling remaining funds to the higher-rate debts will help you get out of debt quicker.

Start by listing all of your debts, including creditor name, amounts, interest rate, and the minimum amount due. It works best when you list them in descending order, starting with the higher rate debt first, and ending with the lowest-rate debt. This way, you know at a glance just how much you need to pay to each creditor and which should be your primary, secondary, etc., focus.

With the completed list before you, determine how much you need to repay to all of your debt on a monthly basis. This means adding up the “monthly minimum due” column. Balance this amount against the funds you have available each month to pay toward your debt. Hopefully, you still have money left over. This amount should then be allocated to the top creditor (i.e. the one that charges you the highest rate). It makes no sense to spread out this extra amount – direct this extra money to your top priority.

One vital element to personal finance management includes putting funds aside in a savings account. However, if you have a large debt load it does not make much sense to save aggressively unless your savings yield greater returns than what you are paying in credit debt (unlikely). Still, even $10 of savings every paycheck will accumulate a surprising balance. This is particularly important when it comes to making lump sum payments against debt or having an emergency reserve for gifts and to satisfy an unplanned urge to splurge.

One option that you should not dismiss is borrowing from friends and, more likely, family to repay higher-rate debt. Typically, family will not charge 19% interest on the money they lend. In fact, they often lend at zero-interest, which means that you will be far more effective in repaying family than you are in repaying credit debt. If your family has the means to lend the money, consider it carefully in order to get ahead financially.

When you have a higher debt load, keep in mind that your rate of progress will appear much slower. It is essential that you keep this in mind and not get discourage after several months of making payments and not seeing substantial reductions in the total debt. Remember that almost immediately you will see improvements in your financial situation when you embark on a debt repayment plan. As well, your credit score will start to reward you within months of starting and sticking to a discipline repayment plan.

Many people will use bankruptcy as a debt repayment option without fully understanding all of the disadvantages of bankruptcy. While a lot of bankruptcy trustees claim bankruptcy provides you with a clean slate to start fresh, many people realize after-the-fact that filing for bankruptcy can actually push you into a deeper financial hole. After all, bankruptcy was created to be disadvantageous to all involved, not just the creditor. That means you really need to understand your financial situation before filing for Chapter 7.

The first of all, the biggest disadvantage of bankruptcy is that it doesn’t eliminate all your debts. You can have debts even after your assets are liquidated and distributed to your creditors. These debts can be collected even after your case is closed. Anyone who cosigns your loan can also be liable.

Your property will be sold by the trustee. In some cases, your debts that couldn’t be repaid after the distribution of assets will be discharged. Any inheritance that you get after filing for bankruptcy can also be considered property and can be used to repay creditors.

When deciding to file for bankruptcy, particularly Chapter 7, you need to be 100% certain of your decision as you cannot withdraw from your commitment. This means that once a discharge has been granted, you cannot avoid or repay the debt, resulting in damaged credit for the next seven years. With a damaged credit rating, most lenders will not consider any credit applications you make, even if you have the means to repay such credit several times over.

Debtors are able to file for Chapter 7 for nearly any amount of debt, however a minimum of six years must elapse before a debtor can file once again.

The procedure to file for bankruptcy also takes its toll on your health and mind. You will be constantly reminded of your conditions. It is a traumatic situation for most.

For many, the stress of bankruptcy leads to marital problems, including divorce. In some cases, this can deepen the financial strain of a discharged bankrupt, leaving them feeling even more defeated or beaten. Remember, six years must pass before the next bankruptcy filing. Relationship stress can cause problems with social circles and not surprisingly, bankruptcy also increases the likelihood of alcohol abuse. The feelings of loss are rather strong in those who have gone bankrupt.

Such feelings of loss, defeat and trauma often make managing regular relationships with other family and friends difficult. The difference in opinion among friends and family, combined with the feelings of guild and shame, often alienate bankrupt individuals from those who have been closest to them.

Despite the disadvantages of bankruptcy, some advantages exit for borrowers who are overwhelmed by tremendous debt loads. One of the biggest advantages is that borrowers who are looking to file for bankruptcy must enroll in a credit counseling program. This program can teach many borrowers how to manage their finances and, in some extreme cases, can help borrowers avoid bankruptcy altogether. However, when there are no other options available, borrowers should consider bankruptcy as a last resort.

Obtaining a bankruptcy discharge is well-known to be an easy process. For most debtors, the appeal of bankruptcy blinds them to the negative fallout of bankruptcy, not the least of which includes a bad credit score, difficulty finding new work, higher insurance premiums, and the fact that the public record of the bankruptcy is available for all to see. In most cases, all a debtor needs to do is devise a repayment plan by increasing income or, more likely, finding ways to reduce expenses.

The key to remaining ahead of your finances and, ultimately leading a debt-free lifestyle includes finding ways to reduce expenses so that you can continue living your life. Since most creditors would rather see some return on your debt, many of them would be willing to accept a reduced principal amount. In some cases, they will not and the debtor will need to take a more aggressive repayment approach up front and slowly ease up (within reason) as the debt gets repaid.

Because a lot of people are so attracted to the seemingly great benefits of bankruptcy, they do not bother with finding ways to reduce expenses. As a result, there is no introspection as to where the cash “leakage” occurs. Without knowing such a detail, bankruptcy will become the only available option rather just one of the options. Here are some areas where people can commonly reduce expenses.

-Stop using credit cards. Use a debit card instead. -Sit down and plan a budget for all expenses. There are many options available, but the point is to stick to it! -Save. Don’t rely on loans to bail you out each time you need to buy something other than groceries. -If you need to borrow, borrow from family and friends who typically offer interest-free loans and no formal repayment requirements. -Instead of eating out, prepare your own meals. This can be fun and even romantic, thereby killing two birds with one stone. -Look for sales and bargains instead of going for high-cost name brands. -Don’t change your lifestyle too much in one go. Introduce one change at a time if you are able to do so. -If you pay your family’s expenses, you need to involve them in cost cutting measures. -Take stock of essential and non essential spending. Food, clothing, shelter, medical care, education are essential expenses. If you don’t need a second car, a second home, or multiple credit cards consider getting rid of them. Use any profit to repay unsecured debt. -If your income does not cover all expenses, consider taking a second, part-time job until you are able to come out ahead again.

By avoiding bankruptcy, you will avoid the heartache and delayed regret that normally stems from a discharge. Although a repayment plan does not provide immediate relief from debt, there are many techniques and software available to help you improve cash flow and repay debt.