In May, inflation hit a 40-year high.1 The accompanying price hikes on goods and services resulted in more Americans relying on credit cards for everyday life. In fact, outstanding consumer credit totaled $1.103 trillion in April – an annualized growth rate of nearly 20%.2
Credit cards are a fantastic way to build up your credit portfolio and potentially earn rewards on purchases you were going to make anyway, but it’s important to avoid growing dependent on them. Familiarize yourself with the consequences so you can responsibly manage your credit cards while enjoying their many perks. Plus, discover cost-saving strategies to mitigate the effects of inflation on your budget.
A cautionary tale
A growing credit card balance can spell trouble for the future, but only if you don’t pay it in full each cycle. This can happen if you live outside your means or are reliant on credit out of necessity. When it does, you’ll incur an interest charge. With the average credit card annual percentage rate (APR) for 2022 standing a little over 19%, you can imagine how this balance might snowball over time.3
- If you’re currently stuck paying off debt on a high-rate card, consider transferring your balance to a General Electric Credit Union (GECU) credit card. As a credit union, we offer competitive rates and enticing reward options to help with Improving the Quality of Your Financial Life!
Credit utilization rate
Your credit utilization rate measures how much available credit you’re using. Lenders use this figure to determine your creditworthiness. For example, if you have a $5,000 card balance but $10,000 available to you, your utilization rate would be 50%. It’s best to keep this rate below 30%, as anything higher indicates you’re too dependent on credit.
If your rate is currently higher than this, don’t panic. Start curbing your spending today and pay down as much credit card debt as you can manage to tip the scales back in your favor.
Debt-to-income ratio (DTI)
Your DTI is another thing lenders look at when reviewing your credit application. This ratio compares your gross monthly income to your monthly debt payments. In doing so, a lender can gauge your ability to make on-time payments. A high DTI equals more risk for the lender. As a result, they aren’t likely to offer you their best rate on loans or credit cards. This will make borrowing more expensive for you, especially if you roll over a credit card balance on a high-rate card.
As with many financial matters, paying off debt is best accomplished with a plan. Use the tips below as you devise your own:
- Look at the big picture. It’s wise to take a holistic approach to your debt payoff strategy. You can accomplish this by taking stock of all your debts. While the total may be overwhelming, you can use this information to calculate an exact payment schedule. Knowing what you need to do and how long it’ll take to get out from under debt can help you stay positive about your financial situation.
- Focus on high-interest debt. As previously mentioned, carrying over a credit card balance will result in interest charges. The higher the interest rate, the more out of hand a balance can get if it’s left to compound over time. That’s why it’s crucial to focus on high-interest debt first. Alternatively, you should consider transferring these balances to a low-rate card to make debt payoff more manageable.
- Consider outside help. You don’t have to face debt alone. Check with your financial institution to see if they offer debt management assistance. A professional will analyze your situation and share options based on your unique needs.
Price hike remedies
Breaking credit card dependence is easier said than done during times of economic hardship. While revaluating your budget can help you spot categories to scale back in, that doesn’t remove your need for necessities – many of which carry much higher price tags today than they did a year ago.
Credit cards aren’t the only option to make ends meet. There are many ways to create wiggle room in your budget that are less detrimental to your long-term financial well-being, such as sourcing coupons when you can, applying cashback to your credit card’s balance, or redeeming points for gift cards.
Along with debt management assistance, GECU members have access to a number of products and resources that make debt payoff easier. Our low-rate credit cards are a no brainer for credit cardholders who need the relief of a lower rate while tackling their debts. Plus, free resources like Money Management and our online debt calculators make planning your strategy simple and straightforward. Not a member yet? You’re eligible if you live or work in the Tri-State. Confirm your eligibility here, then apply for your card online in minutes!