If you think inflation feels bad at the grocery store or at the gas pump, consider the pain it inflicts on a credit card statement, where higher prices don’t just impact the cost of the items purchased, but also on the financing to pay for them.
And according to several recent studies, a growing number of consumers are feeling this discomfort from the bills they see each month, as credit card balances approach record highs and look certain to surpass previous highs and eclipse 1 trillion dollars for the first time.
This is proof that many Americans engage in poor financial behavior.
Yes, I would like to believe that regular readers of a column like mine are financially responsible and not oblivious to debt; I hope what I’m about to say sounds mostly like a sermon given to the choir.
But as times change, strategies with credit change too. Behaviors that were acceptable and responsible a short time ago are no longer as healthy or appropriate today, a situation that will only get worse until interest rate hikes stop and inflation step back.
Meanwhile, the numbers suggest that many Americans — and the country as a whole — are headed for a credit card debt crisis.
Just last year, few people would have predicted such a thing.
As the pandemic took hold in 2020, Americans cut spending and focused on debt reduction; National credit card debt fell from a record $927 billion in the fourth quarter of 2019 to $770 billion in the first quarter of 2021, according to consumer debt data from the Federal Reserve. Bank of New York.
Since then, however, Americans have added more than $100 billion to their revolving credit balances, which now total some $887 billion.
With inflation and interest rates on the rise – along with other factors that are struggling for many consumers – it’s a lock that the old record will soon be broken, likely by the end of the year. ‘year.
At the same time, the rates themselves break another record, for the highest average credit card rate nationwide.
Bankrate.com pegs average credit card rates at over 18%, the highest since 1996.
This barely explains the Federal Reserve’s latest interest rate hike, which card issuers hadn’t fully digested before the central bank raised interest rates by 0.75 percentage points. Wednesday.
In addition, the Fed has signaled that it will likely raise rates again – by a total of 1.25% – before the end of the year.
LendingTree, which in 2019 began tracking rates on 200 of the nation’s most popular credit cards (issued by over 50 lenders) recently pegged the average credit card interest rate at around 21.6%, a record.
And several studies show that the average interest rate on new cards issued today is north of 21%.
With further increases already planned, rates of 25% will not be outliers by the time New Year’s Day rolls around.
This should be enough to dissuade consumers from going into debt, but it is not.
LendingTree analysts calculated the national average card debt among people with outstanding balances to be $6,569. Meanwhile, a CreditCards.com study released this week showed that nearly two-thirds of credit card debtors have had a balance for at least a year.
If you’re constantly faced with credit card bills – never resetting balances after big purchases or just regular monthly expenses – then carrying credit card debt isn’t a temporary way to getting by is an ongoing part of your financial strategy.
Good luck with this, as high prices and higher rates will make it harder to repay in the future, adding years to the time it takes to zero a bill by paying at or near minimum.
Worse still, although you can try to blame the situation on the economy and rising prices, most credit card debt problems are the fault of the borrower.
Yeah, the dollars aren’t going as far now as they were a year ago. But this doesn’t just apply to the goods you buy, it also affects the interest you owe. If you have $5,000 in credit card debt and are making monthly payments of $500 while trying to reduce the balance, less of your money is now going to the principal (unless you have a fixed rate card).
Your behavior may not have changed, but your payment date is further away and your efforts have become less effective.
The good news, if there is any, is that so far consumers seem to be paying their bills. Delinquency levels are historically low, and the debt-to-income ratio is not exceptionally high.
That could change overnight, however, as the cumulative effects of more expensive everyday life continue to knock on our doors.
With this in mind, consumers need to fine-tune their spending and eliminate all high-interest debt.
With so few investment products currently promising double-digit returns, anyone with debt to repay should consider “investing” in repayment as a good return on their money.
Making progress is tough with inflation north of 8%, so write down any debts, track your spending, and see where you can cut ledger expenses to improve the outlook for what you owe.
Trade-offs can be difficult, but ask yourself if debt is causing more pain – monetary or emotional – than spending cuts; if so, tackle the debt.
Consider refinancing where possible. There are still low rate balance transfer offers available; consider moving credit card balances, but beware of transfer fees and the costs that will arise if you can’t pay off the debt before the interest rate expires and the normal rate comes in to kick your ass buttocks.
Consider the timing of major purchases and evaluate financing options before heading to the store or dealership. Monitor your credit rating; the more progress you can make to improve it now, the more it can help you if you need to seek a refinance deal down the road.