Inflation has led to a notable increase in credit card balances as consumers face higher prices for goods and services. As the cost of living rises, individuals often turn to credit cards to cover everyday expenses, leading to increased borrowing. This reliance on credit is compounded by wages that may not keep pace with inflation, forcing many to use credit cards to bridge the gap between their income and expenditures. Additionally, higher interest rates which are a typical response to inflation by central banks, make it more expensive to carry a balance on credit cards.
This combination of rising prices and higher interest rates creates a cycle where credit card debt grows, making it harder for consumers to pay off their balances and potentially leading to greater financial strain. If you’ve found yourself in this situation, you are not alone. In this article, we will discuss growing credit card balances, delinquencies, rates, and whether you should consolidate your debts into a mortgage BEFORE you make a late payment.
Credit Card Delinquencies
High balances and high interest rates are leaving some families in a position where they may be facing missed payments. According to the New York Federal Reserve, credit card delinquencies are up to 8.90%. In addition, the utilization rate has a profound impact on driving delinquency.
“While borrowers who were current on all their cards in the first quarter of 2024 had a median utilization rate of 13 percent in the previous quarter, those who became newly delinquent had a median rate of 90 percent.”
These charts and numbers tell us that the higher the amount you have utilized of your credit card balance, the higher you are at risk of becoming delinquent. If you’re getting maxed out on your cards, then it’s time to do something about it BEFORE you miss a payment.
Impact on Your Credit Score from a Late Payment on a Credit Card
For anyone carrying a balance on credit cards, especially nearing their max, the impact of just one late payment over 30 days could drop their credit score by approximately 100 points. This can impact their ability to secure future financing.
Missing a payment on a credit account can have significant adverse effects on your credit score. Payment history is one of the most crucial factors in calculating your credit score, accounting for about 35% of the total score in most credit scoring models. A missed payment, even if it’s just a few days late, can be reported to credit bureaus and stay on your credit report for up to seven years.
This can lead to a substantial drop in your credit score, making it more challenging to obtain new credit or secure favorable interest rates. Additionally, a missed payment can trigger late fees and higher interest rates on existing balances, further exacerbating financial strain. Repeatedly missing payments can lead to more severe consequences, such as defaulting on loans, which can severely damage your creditworthiness and limit your financial opportunities in the future.
How Home Equity Financing Helps
With credit card interest rates over 27%, the key to saving money is moving balances to an option with a lower interest rate. Since a home secures the loan, the interest rate is much lower than that of credit cards, which are unsecured. Interest rates for home equity loans range from 7% to 12% in today’s market, which is much lower than the 27% borrowers are dealing with now.
We take a deep dive into the numbers, but it’s important to consider the long-term costs of minimum payments on credit card balances and the extra money you pay over time.
A first mortgage is the primary loan obtained to purchase a home, secured by the property itself. It has priority over other liens or claims on the property. The terms of a first mortgage typically include a fixed or adjustable interest rate and a repayment period ranging from 15 to 30 years. In contrast, a second mortgage, also known as a home equity loan or line of credit, is an additional loan taken out against the equity in your home, which is the difference between the home’s current market value and the remaining balance on the first mortgage.
Second mortgages usually have higher interest rates than first mortgages because they are subordinate. If the borrower defaults, the second mortgage lender is only repaid after the first mortgage lender is satisfied. Despite the higher risk, second mortgages can be a useful financial tool for accessing significant funds for major expenses like home improvements, education, or debt consolidation.
If you have a great mortgage rate on your first loan, a second may be a better option for you. Either way, getting rid of credit card debt benefits a person who is getting close to being maxed out. Refinancing can save you money, freeing up extra cash in your monthly budget while helping you avoid the risk of missing payments and harming your credit score.
In Conclusion
The numbers show that more and more people are getting closer to having to make difficult financial decisions about their debt. The best thing to do is to look at your options before you’re forced to make a hard choice that could significantly affect your financial future.
Credit Card Delinquencies 9%
Average Credit Card Rate 27.65%
Estimated Impact of a Late Payment to Credit Score 100 Points
Time That a Late Payment Can Affect Your Credit Score Up to 7 Years
Refinancing to a first or second mortgage can be a strategic move to avoid delinquency and save money. By refinancing, you may secure a lower interest rate, which can reduce your monthly mortgage payments, making them more manageable. This can be particularly beneficial if you’ve seen an increase in your income or an appreciation in your home’s value since you took out your original mortgage. Additionally, refinancing can allow you to consolidate high-interest debts, such as credit card balances, into a single, lower-interest loan.
This not only simplifies your financial obligations but also reduces the overall interest you pay, freeing up cash flow and helping you stay current on your payments. Refinancing can be a valuable tool in avoiding delinquency and achieving long-term financial health by lowering monthly expenses and improving financial stability. Let us know how we can help you BEFORE a late payment drives your credit score too low to qualify.