Need a Refinance with Excess Debt?

With the stimulus checks that have circulated in the last few years and people staying home more because of the pandemic, credit card debt shrunk drastically. People were able to pay balances down and even save some money. Unfortunately, it seems that with inflation at the level it is, credit card debt is now at an all-time high. According to the Federal Reserve, credit card debt rose by 20% in April 2022.

Because prices have risen on everything over the last few months, and most incomes have stayed the same, many consumers are being forced to rely more on credit cards to pay for every day living expenses like gas and food and sometimes even to pay their bills.

The big problem with this is that revolving balances are a large part of a consumer’s credit score. While payment history makes up the largest part of a credit score at 35%, the amount owed is the second largest factor at 30%. So, keeping balances low is just as important as paying bills on time. Revolving balances weigh more heavily than installment balances. While it is important for a good credit score to have both, close attention needs to be paid to revolving balances.

As consumers use their credit cards more this also means their credit scores are most likely taking a big hit. Optimally you do not want more than three credit cards with balances and those balances below 10% of the high credit. That’s not cumulative, that’s for each card.

While paying down credit cards might not seem feasible for some right now, there are things that people can do that could ease some of the pain without having to put out a lot of money. Even though interest rates are rising, which includes credit cards, it is still possible to get yours lowered. If a consumer has a long-standing relationship with a certain credit card, and they have no delinquent payments on it, there is a good possibility that once a year they will agree to lower the interest rate. It is always worth a phone call. Most credit cards have a variable interest rate. Right now, that interest rate averages 16.62% but by the end of the year that could rise to close to 19% which would be an all-time high. If a borrower has cards that have a long history and no delinquent payments, now would be a good time to ask for a lower interest rate.

Another possibility is to ask for the credit limit to be increased. For some, this can be a temptation to use the card more. However, if the limit is increased but your balance stays the same and decreases over time this shows responsible credit utilization and can help to raise your credit score. When Banks and lenders see several maxed-out credit cards or lines of credit it is a red flag to them of financial distress.

An option for those with several credit cards would be to transfer some or all the balances to the card with the lowest interest rate. Some creditors even offer 0% interest for up to a year or more when you open a card with them. While this can be a double-edged sword, in some cases this might be a good option to get through this time. Yes, it will be a new inquiry and a new account with no history but in the long run, it could make it much easier to get the balances paid down. HELOC’s and personal lines of credit normally also have extremely low-interest rates. Opening one to pay off credit cards could also be a viable option and would drastically reduce the time it took to pay off the balance.

While this is a frustrating time financially for a lot of consumers, we need to keep in mind it is only temporary and there are things that can be done proactively to ease the pain as we move through these times of uncertainty.

If I can be of any assistance, please reach out! You can reach me, Scott Rojo, at 916-548-3942 or through my website, rojomortgage.com/contact.