Can You Afford the Cost of Debt?

The latest interest rate hike by the Federal Reserve means the cost of debt from your credit cards just increased.

Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…

The interesting study

The Federal Reserve raised interest rates in March. It’s the fifth increase in interest rate in about a year and a half, and it may not be the last. When the Fed raises their rates, your creditors raise your rates, too. Unless you have a rare fixed-rate credit card, you can expect your credit card interest rates to increase within the next few months.

Given this newest increase, Wallet Hub has revised their list and map of cities with the most and least sustainable debt. They’ve also released a guide to the interest rate hike so you can see how the increase will affect the cost of debt repayment for you.

Source: WalletHub

The big result

According to Wallet Hub’s analysis, the 0.25% increase will cost credit card users an extra $1.6 billion in finance charges this year. With the five increases together, credit card users are paying $8.4 billion more interest charges.  If rates continue to increase, then credit users will pay even more to eliminate their debt.

“Higher interest rates make it even harder to pay off debt,” explains April Lewis-Parks, Financial Education Director for Consolidated Credit. “A higher rate means that more of each payment gets eaten up by interest charges. The cost of debt increases and the hill to eliminate it gets steeper.”

The fascinating details

Wallet Hub’s study evaluates cities for “debt sustainability” using four factors:

  1. Months until payoff
  2. Average credit card debt
  3. Most of debt increase from one quarter to the next
  4. Percentage of people with credit card debt

Sustainability refers to the ability to keep something up. In terms of debt, it refers to the ability to keep up with your payments and eventually reach zero. Cities in the 99th percentile are the cities that struggle with debt the least. On the other hand, cities in the 1st percentile are the most at risk of financial hardship and bankruptcy.

Cities with the Most Sustainable Credit Card Debts Cities with the Least Sustainable Credit Card Debts
Camden, NJ Magnolia, TX
Harvey, IL Beverly Hills, CA
Portsmouth, OH Dahlonega, GA
Garden City, KS Palmetto Bay, FL
Cicero, IL Greenwich, CT
Alamo, TX Miami Beach, FL
Greenwood, MS Cumming, GA
Darlington, SC Richmond, TX
West Memphis, AR Odessa, FL
Donna, TX Brookhaven, GA
Nogales, AZ Harker Heights, TX
Eagle Pass, TX Monsey, NY
Mason City, IA Kailua, HI
Dolton, IL Freehold, NJ
East St. Louis, IL Park City, UT
Hammond, IN Canton, GA
Clarkston, GA Lake Forest, IL
Forest Park, GA Southlake, TX
Hartsville, SC Manahawkin, NJ
Danville, IL Buford, GA

If you live in a city that has “unsustainable debt” it means that you are likely to struggle to pay off your debt. The cost of debt repayment will usually exceed what you borrowed in the first place. In other words, you’ll pay more in finance charges that what you paid out checkout.

What you can do

“If you’re carrying credit card balances, then rate hikes by the Federal Reserve are not good for you,” Lewis-Parks explains. “You need to look into options for debt relief that will lower your rates so it’s easier to pay off. What’s more, if you plan on using do-it-yourself debt consolidation, do it now. Interest rate increases will also make DIY options less cost effective. Rate increases affect the cost of debt repayment for loans, too.”

Essentially, if you want to pay back everything you charged in-full to avoid credit damage, you have three options:

  1. Transfer the balances to a balance transfer credit card
  2. Consolidate with a personal debt consolidation loan
  3. Enroll in a debt management program

“Rate increases make two out of those three options less cost effective,” Lewis-Parks says. “Even with balance transfer credit cards that offer 0% APR promotions, creditors are shortening those periods now due to the higher rates. So, if you want to solve your challenges with debt on your own, you need to do it now.”

The good news is that even if rates continue to increase and the cost of debt repayment becomes too high with DIY consolidation. You still have options. You can seek professional help to consolidate your debt. With a debt management program, you get a team of certified credit counselors on your side. They negotiate to reduce or eliminate interest charges on your behalf. Most clients see their rates reduced to between 0-11%.

Magalys from Woodland Park, NJ

The best thing I could have done was to make that first call and I’m glad I did. I’m almost debt free. Thank you!

Where she started:

  • Total unsecured debt: $24,454.00
  • Estimated interest charges: $13,786.94
  • Time to payoff: 13 years, 6 months
  • Total monthly payments: $978.16

After DMP enrollment:

  • Average negotiated interest rate: 2.70%
  • Total interest charges: $2,149.04
  • Time to payoff: 3 years, 1 month
  • Total monthly payment: $710.00