Grant Yaney and his wife paid off almost all of their credit card debt at the start of the pandemic and finally felt like they were moving on financially.
Credit card debt and interest rates both rise as consumers battle inflation
“We’re trying to do our best to manage with what we have,” said Yaney, 49, a financial analyst for a Little Rock hospital. “But I can’t stop feeding my family. I can’t stop paying utilities. So unfortunately things like credit cards may have to be late – which means late fees kick in and interest doubles – and the next thing you know, we’re way behind and there there is no way to catch up.
After a reprieve in the coronavirus era, Americans are once again borrowing heavily to cope with decades-high inflation on essentials such as food, gasoline and housing. Credit card debt is growing at its fastest rate in more than 20 years, according to the Federal Reserve Bank of New York. Overall, Americans owe $887 billion on their credit cards, up 13% from a year ago.
Now, as the Fed rapidly raises interest rates to contain inflation, families are also feeling the pinch of higher borrowing costs. Average credit card rates, at 18.7%, are at their highest level in 30 years and will likely continue to rise, according to Bankrate.
Credit card debt rises as inflation pushes Americans to borrow more
The result, for many, is a snowballing sense of desperation as debt and interest rates soar at the same time.
“Credit card debt is inherently risky, and the people who are being pushed into more debt as the economy slows are people who have no other good options,” said Christian Weller, senior fellow at the Center for American Progress and professor of public policy at the University of Massachusetts in Boston. “It creates a vicious circle of financial insecurity, especially for households of color.”
Economists say there is little risk that a pile of unpaid credit card balances could threaten the US financial system. But the pressure on families — especially those who had paid off their debts using stimulus checks and pandemic-era savings — is likely to be acute.
Debt is piling up as the US economy appears to be heading into a recession. There are growing fears that aggressive Fed tightening, combined with global turmoil, could lead to a prolonged economic slowdown.
A number of worrying economic wild cards also remain. Widespread job losses, for example, could mean that even borrowers who have so far been able to meet monthly payments could quickly fall behind. Experts say this could lead to a wave of personal bankruptcy filings that could dent consumer spending and deepen a recession.
“The worry is what’s going to happen two years from now if people aren’t able to repay that debt,” said Mary Eschelbach Hansen, an economics professor at American University. “Bankruptcy filings were very low during the pandemic, but there’s a real concern that could change, which could be a really serious issue.”
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In Indianapolis, Zachary Harmon has taken on more than $2,200 in credit card debt over the past year, mostly to cover basic expenses, such as food and utility bills. The 28-year-old, who receives $500 a month in disability checks and earns a few hundred extra dollars as a video game streamer, says it’s getting harder and harder to keep up with the expenses.
He recently gave up his $900 a month apartment to move back in with his mother and is donating plasma to a local clinic to pay off his credit card debt.
“I was doing well, making ends meet, but inflation kept going up, and it was getting harder and harder,” Harmon said. “You go to the grocery store now and it’s $3 for a loaf of bread. It keeps piling up.
Americans paid off an unprecedented $83 billion in credit card debt in 2020, according to WalletHub estimates. Federal stimulus money, combined with a spending slowdown — on gas, travel, restaurants and goods — meant families suddenly had more money to spend on long-standing debt. But as the economy has reopened and inflation has hit 40-year highs, Americans are borrowing more, for longer.
Nearly half of American credit card holders have outstanding debt on those cards, with an average balance of $5,270, according to data from CreditCards.com and TransUnion.
There are also signs that people are falling further and further behind. The share of borrowers who are at least 30 days behind on their credit card payments has increased from 4.4% a year ago to 4.8%, according to the New York Fed, although they are still well below historic levels.
And Americans with credit card debt take longer to pay it off. Sixty percent of those with balances have been past due for at least a year, up from 50% a year ago, according to a CreditCards.com survey by YouGov. The percentage of borrowers with at least two years of debt also increased, from 32% to 40%.
Young adults and those with the lowest household incomes are most likely to have credit card debt for necessities such as groceries, childcare and utilities, the survey finds. .
“As prices rise, people are piling up more and more debt — and that’s quite concerning because it could lead to higher default rates,” said Olga Gorbachev, an economics professor at the University of Delaware. , whose work focuses on credit cards and inequality. “It’s going to fall especially hard on generally disadvantaged consumers: the poor, single mothers, people who are already in bad shape financially and in terms of income.”
Inflation wiped out recent wage gains for almost all workers. Prices have climbed 8.2% since last year, while the average hourly wage has increased by less than 5% over the same period. This has forced many families, especially low-income ones, to save money or take on more debt to make ends meet.
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Back in Arkansas, for example, Yaney and his wife, who works for the federal government, say their 2% pay raises haven’t been enough to offset rising costs for their family of four. They’ve postponed family vacations for two years and are growing tomatoes, zucchini, peas and okra to save on groceries. Yaney and her teenage son hunt and fish more for food for their family.
Even so, he says, credit card debt — along with late fees and interest — continues to pile up. The Yaneys have four cards in all, although they only use two. The others are private cards with particularly high interest rates.
“It’s certainly not frivolous spending,” he said. “My wife and I celebrated our 20th anniversary and we didn’t even go out to eat. We try to find inventive ways to make ends meet, like everyone else.
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Dee Chartier, a freelance photographer in Shelton, Washington, started relying more on her credit cards about a year ago, just as gas prices were starting to climb.
Since then, the 55-year-old and her husband have gotten six new cards and racked up nearly $20,000 in debt to pay off the essentials. Her bloated debt load, she said, has lowered her credit rating, meaning card companies are charging her higher interest rates. A credit card, she says, recently jumped from 18% interest to over 29%.
“When your paycheck doesn’t cover everything and you need gas to get to work to get a paycheck, where do you get that money? You put it on your credit card,” Chartier said. “It’s not like we’re trying to live beyond our means. No. We are just trying to survive.
In total, she and her husband, who works as a manager at a large grocery chain, have about $35,000 in credit card debt, up from $7,500 before the pandemic.
“I’m like, ‘God, I wish I could pay for this and get rid of it,'” she said. “But now we’re in this cycle that we can’t really break. And it will only get worse. »