American consumers are back to their old bad habits when it comes to credit card debt, according to a study by WalletHub.com.
“I’m not surprised,” said Nancy Latham, a financial instructor with Michigan State University Extension. “It’s pretty easy to get a credit card these days and there’s all sorts of incentives for spending.”
The problem is the more you spend the more you have to pay back.
“The latest credit card debt statistics tell us that consumers have not only returned to pre-pandemic spending habits, but are also making up for reduced spending during COVID. After cutting back at the height of the pandemic, U.S. consumers added $86 billion in new credit card debt in 2021, resuming a pattern of unsustainable spending that had become the norm before the pandemic,” Jill Gonzalez, WalletHub analyst said in a news release, noting around 33 million of the Americans surveyed also said they are expected to have more credit card debt by the end of 2022.
Cause and effect
“There are two main reasons I believe this is happening,” said Jeffrey Hopson, assistant vice-president of retail services for Michigan Schools and Government Credit Union.
Mortgage rates and home equity rates have increased significantly over the past year and this makes it less appealing to consolidate debt through mortgage products, especially for those locked in with lower rates.
Secondly, the cost of everything is on the rise.
Inflation and the increasing cost of goods are high, resulting in growing debt on credit cards. For example, purchasing essentials such as gas and groceries are much more expensive than a few years ago.
Of the people surveyed by WalletHub about 89% said they are worried about inflation right now and anyone who says otherwise is either putting on a brave face or not paying attention to what’s going on.
“Even government officials who previously called inflation merely ‘transitory’ are now recognizing we have a bigger problem on our hands,” Gonzalez said. “Roughly 76% of Americans are more worried about inflation than interest rates, and 8 in 10 of Americans think we’re headed for a recession.”
“Add that to the fact that over the last couple of years consumers were responding to COVID-19 lockdowns so they were going out less, which resulted in less spending on things like vacations and eating out. Now with restrictions behind us, people are excited to get out and as a result are using credit cards to cover additional expenses,” Hopson said.
“This has resulted in less discretionary dollars (or tighter budgets) and credit card holders paying the minimum balance, which means they’re carrying larger balances month-to-month and accruing more.”
“When the pandemic hit, a lot of people paid down their debt more quickly because of the funds they received and because they were not out and about doing things,” said Rann Paynter, CEO of Michigan Bankers Association.
“Now it’s creeping back up,” he said.
The numbers
The average household credit card balance in the first quarter of 2022 was $8,425, which is about 12% higher than it was in the same quarter for 2021.
“It still could have been worse,” Gonzalez said. “Consumers actually paid down some of their credit card balances during the first quarter of 2022, as is customary for the beginning of the year but we can expect the next few quarters to reflect nothing but new debt being added to the books.”
Other key finding of the study and survey showed:
• The average household credit card balance was $8,425 in the first quarter of 2022, which was 11.9% higher than the same quarter in 2021.
• The average annual increase in credit card debt over the past 10 years is $49.7 billion
• The best balance transfer credit cards currently offer 0% APRs for the first 15-21 months with no annual fee and low balance transfer fees
Grab it by the horns
Ignoring the debt is the biggest mistake people can make.
Instead take a good look at what you’re spending.
“A well-thought-out budget is a must-have,” Gonzalez said. “If you don’t get your spending under control and begin to build an emergency fund, you’ll wind up right back where you started even if you manage to get out of debt temporarily.”
Latham concurred.
“You have to figure out how much money you’re spending every month and what you’re spending it on. Because you cannot change what you don’t know,” said Latham, who has been helping people with their budgets for more than 40 years.
She remembers one couple in particular who were struggling to pay their monthly mortgage, so she had them make a list of their daily expenses. Turns out while the husband was making his lunch at home he was stopping every day on his way to work to buy coffee, a pack of cigarettes and a pop for his lunch. So, instead of getting the pop on his way to work she advised him to buy it on sale in large quantities.
Two weeks later he returned to Latham’s office saying he could not believe the difference it made.
“He told me, ‘For the first time in my life I had money in my pocket at the end of the week,’” said Latham, noting it doesn’t seem like a lot of money but it all adds up.
The $1.99 for pop or $9 for a speedy breakfast every day adds up to nearly $55 a week.
“I know it works,” said Latham, who went through a few financial hurdles after her divorce. “There wasn’t anything digital back then. I used accounting paper and had a column for every item I purchased: gas, groceries, laundry detergent. I kept track of everything and I never shopped without a list.”
When you do run into trouble with house payments or credit card debt it’s also important to talk to your lender said Paynter, especially when you know you’re going to have a challenge paying your bills.
“Ultimately the bank wants to help its customers,” he said. “The stronger the customer, the stronger the community and the stronger the bank is in that community.”
Consumers can also consolidate their higher interest debt.
“There are a few different loan options, such as a personal loan, home equity loan or transferring balances to a low fixed-rate card,” said Hopson. “We always recommend checking your current rate.”
Then compare that with a few other cards. MSGCU for example, has a Titanium Visa Credit Card with a low fixed interest rate. Your own bank might have similar plans available.
“People trying to get out of credit card debt should also take advantage of 0% balance transfer credit cards while they are still available. Attractive balance transfer offers tend to dry up during downturns, or even just periods of economic uncertainty, and most people think that’s what we’re headed for,” Gonzalez said.
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