Your credit card debt is more than just the money you owe. It's the barrier between good and great interest rates, and good and great credit scores. If you ever want to purchase a new car or house, or if you're a small business owner that needs a good personal credit score for loans, there's no doubt that you'll want to have your credit cards paid off. If you don't fully understand why offloading your credit card debt is so important, keep reading!
You will not realize how important it is to pay off credit card debt until you realize how costly it is to avoid doing so. That usually kicks in when you try to make a big purchase -- especially when you first apply for a mortgage and find out you qualify for less than you thought because of the debt load you carry.
If you're laden with debt you are seen as a higher risk to the mortgage lender. Thus, you are given a less-than-ideal interest rate. Your credit card debt will also be holding back your credit score from greatness, which further contributes to less-than-ideal interest rates. To give you an idea... a 0.25 percent difference in interest rates means a $20 higher payment each month on a 30-year, $150,000 fixed-rate mortgage.
Furthermore, if your credit card debts hold your score down it is likely you will resort to an FHA-insured home loan. This financing option comes with a 1.75 percent upfront fee, which you can roll into the term of your already pricey home loan.
Your credit score is a mathematical equation, which FICO calculates based on five key factors: Your Payment History (35%), Your Amounts Owing (30%), Your Credit Age (15%), Your New Credit (10%) and Your Credit Diversity (10%).
So, what does credit card debt mean if you wish to have excellent credit? First off, any delinquencies can hurt your score big time. With a strong credit rating, your first late payment could cost you as much as 110 points.
But what if you never miss a payment?
There's still the glaring issue that your credit card debt keeps your utilization rate up, which is how your "Amounts Owing" gets calculated. You can reduce this ratio by paying off your credit card debts -- in turn, there will be a noticeable increase in your credit score for some time to come.
You might have read this article from NerdWallet, 3 Reasons to Start Paying Off Your Credit Card Debt Now. It mentions how you can get a lower interest rate, of course. Two unique points brought up in the article are: a reduction in your credit utilization rate and more available funds for your monthly budget.
"Cash is king," so getting your affairs in order increases your purchasing power -- and the faster you do it the less you'll pay in interest in the long run. The cost of keeping your credit card debts unpaid truly outweighs the expense of paying them off. You will avoid accruing interest, something which can add up fast if you only make the minimum payment each month.
You can always consider ways to fast-track your credit card repayment battle, which is especially a good idea if your cards have high interest rates. For most, this means obtaining a consolidation loan at a lower interest rate. A consolidation loan not only helps you to pay off credit card debt, but it also improves your credit utilization rate right away as it's a loan and doesn't factor in to your ratio.