As inflation and rising interest rates drive more consumers to seek credit, outstanding credit card debt has reached a record high of $986 billion, according to the Federal Reserve Bank of New York. Credit cards can help bridge the gap between wages and expenses, but it's important to be mindful of the risks of carrying too much debt. Here’s what you should know, from myFICO.
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Delayed homeownership
Having high credit card balances can be a major obstacle in getting approved for a home loan. Even with good credit, a high debt-to-income ratio may not be acceptable for lenders since it shows you're spending a sizable percentage of your monthly income on debt payments.
If you're carrying a lot of credit card debt, you may need to wait until you've paid down your debt before you can afford to purchase a home, or make a bigger down payment and look for a lower-priced home.
Fewer rental options
Landlords who find significant credit card debt during the tenant screening process may be less likely to approve your rental application. High credit card balances could be a sign of financial instability signaling that you could have trouble making rent payments. You'll have to search for a landlord who's more flexible or stay put while you pay down your balances.
Missing out on new credit card deals
Eliminating credit card debt is essential if you want to take advantage of higher-tier credit cards with their generous welcome bonuses, cash back incentives, concert presales, streaming discounts, and other exciting benefits. Otherwise, high balances may affect your eligibility for these new cards. Keeping up with the latest available perks, however, can be the motivation you need to tackle your debt so you can qualify in the future.
Difficulty saving for emergencies or retirement
Carrying a high amount of credit card debt can be detrimental to your financial health. Not only does it reduce the amount of money available for saving for emergencies and retirement, it can also lead to higher credit-based expenses, such as an increased auto insurance rate. And since credit card rates are high, your interest payments are likely to outpace the earnings on your savings and investments.
Less financial flexibility
The high cost of credit card payments can put a strain on your income, leaving little room to cover all your monthly expenses. Without extra money in the budget, it may be difficult to spend money on leisure and entertainment, like taking a vacation or attending live events. Improving your home life by purchasing new furniture or appliances may also be a challenge.
Watch for Signs of Rising Credit Card Debt
Credit card debt can catch you off guard. Even when you're on top of your payments, you can miss the signs that your balances are getting too high. Keep a close eye on the amount of debt across all your cards and make a conscious effort to reduce your spending when you notice your balances are going up each month. Paying off existing debt and limiting new credit card purchases is the most effective way to safeguard your financial future.
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