There is no doubt that credit card debt can have a negative impact on consumers. Carrying over a credit card balance from month to month will result in the addition of monthly interest charges. Long-term credit card debt will not only increase your balance due to these monthly interest charges, but it could further result in a higher interest rate. Unfortunately, the negative impacts of a credit card balance are considerable. Below are just a few of the dangers you might encounter from carrying long-term credit card debt.
1. It may affect your credit score
Credit utilization, or the amount of credit you use, will affect your Fair Isaac Corporation (FICO) score. If, for example, you have a $10,000 credit limit and you charge $5,000 in one month, your credit utilization of 50 percent is considered to be quite high. FICO views a high utilization negatively because it’s an indicator that you could max out your credit, or be very close to maxing out, every month.
You may be tempted to transfer your balance to another card that offers a lower introductory interest rate for a certain time period. While this idea could help you quickly pay down your balance, there are some factors to keep in mind. First, you need to remember that your credit score takes a hit every time you open a new account. It is in your best interest to keep the number of accounts you open to a minimum. Second, if the idea is to pay off your balance more quickly, you need to make sure you are financially able to accomplish this goal. If the time period of your special interest rate ends, but you still have a balance, you will continue to rack up interest on the total amount that is leftover.
2. It may affect your ability to get a loan
When you carry a credit card balance, it means that you are carrying debt every month. The way to a get a good credit rating is to pay off debt. Paying your credit card balance every month means you are on your way to a better credit score. Additionally, paying off your balance every month will allow creditors to see that you are financially responsible and capable of paying your debts. This, in turn, makes creditors more likely to want to lend you money for an auto loan or mortgage. What’s more, creditors extend more favorable interest rates and terms to those who are financially sound, so your loan could cost you less than it would if you had a lower credit score.
Conversely, carrying a credit card balance might translate differently to creditors, proving that you do not know how to properly budget for all of your bills and that you essentially cannot afford to pay your debt. In that instance, they may ask themselves why they should even bother loaning you more money when it’s obvious to them that you are unable to pay off the loans you already have.
It’s important to remember that paying a loan, such as a mortgage or auto loan, is different than paying a credit card balance. Carrying a balance every month on your credit card is generally not a good idea; however, having a balance on an auto or home loan is not as damaging provided you are making timely payments. According to FICO, if you are diligently paying off your installment loans, you’re viewed as a responsible consumer who can manage debt.
3. It may affect your insurance rates
You may already be aware that your credit card debt can affect your credit score and your chances for obtaining a loan. Did you know that it can largely affect your insurance rates as well? According to the National Association of Insurance Commissioners (NAIC) and FICO, 95 percent of auto insurers and 85 percent of homeowners insurers consider your credit score when determining your insurance rates. Insurance companies use something called a credit-based insurance score, which factors in parts of a person’s credit history to determine what rates should be applied. NAIC’s breakdown of a credit-based insurance score is as follows:
- Payment History (40 percent) — How well you have made payments on your outstanding debt in the past
- Outstanding Debt (30 percent) — How much debt you currently have
- Credit History Length (15 percent) — How long you have had a line of credit
- Pursuit of New Credit (10 percent) — If you have applied for new lines of credit recently
- Credit Mix (5 percent) — The types of credit you have (credit card, mortgage, auto loans, etc.)
The Ohio Department of Insurance does allow insurance agencies to consider your credit history when determining your insurance rates. They may not, however, use this history as their sole basis for making a decision.
How Our Ohio Consumer Law Attorneys Can Help
If you struggle with high credit card debt an Ohio consumer law attorney may be able to help you. The Ohio consumer law attorneys at Luftman, Heck & Associates have extensive knowledge of consumer debt and can explain ways in which you may be able to get yourself out of financial trouble. Call today for a free consultation at (888) 726-3181, or email us at email@example.com.