NEW YORK — For Americans who had no savings before the pandemic, financial stress is increasing. A combination of inflation, higher interest rates and the end of pandemic-induced relief such as the moratorium on student loan payments has led to record credit card debt, experts say.
As of the third quarter of 2023, Americans had more than $1.05 trillion on their credit cards, and the average interest rate on a given credit card is now roughly 21.5%, the highest interest rate since the Federal Reserve began charging in 1994. keeping track of interest rates. A report from credit rating agency Moody’s shows that credit card delinquencies are now well above 2019 or pre-pandemic levels.
Silvio Tavares, president and CEO of VantageScore, one of the country’s two major credit scoring systems, said, “The reality is that some significant signs of stress are starting to appear,” despite consumers generally being in good financial health.
If you’re facing higher credit card debt while feeling the lingering effects of inflation, consider the following:
One of the first things you should do is ask your credit card company to lower your rates.
While the Federal Reserve said on Wednesday that the first interest rate cut is likely months away, the average credit card interest rate is already well above the rate set by the Fed. Most companies offer promotional rates and ways to move your balance to low- or zero-interest cards, at least for the first year. These promotions can help prevent debt from piling up.
That said, you may have to pay a balance transfer fee and pay off the balance before a certain promotional period ends, or you may have to pay additional interest.
Furthermore, reports on banking sector sentiment show that banks are becoming increasingly conservative in the loans they make, meaning refinancing could become more difficult.
Known as the ‘avalanche approach’, paying off debt that earns interest faster will always be more efficient than paying off debt with lower interest first. This is the most financially responsible way of debt management.
Another way, known as the ‘snowball approach’, considers the psychological benefits of paying off small debts first, which can boost morale, before tackling larger debts. Some financial advisors consider this method to be more motivating.
Credit counseling for nonprofits can be found through the National Foundation for Credit Counseling at nfcc.org.
Where possible, advisors also encourage consumers to consolidate loans, at fixed rates where available. The Federal Trade Commission’s Consumer Advice Guide to Eliminating Debt can help you make a plan.
When it comes to student loan payments, also make sure to consolidate all that debt and take advantage of every way you can to reduce those monthly costs.
The Public Service Loan Forgiveness program is one of many relief options still available to many with student debt. Other resources for borrowers include: false certification, borrower defense, closed schools, total/permanent disability discharge, and alternative repayment programs such as means-tested repayments.
Inflation has fallen from its peak, but the cost of many goods and services remains high: A loaf of bread that cost $1.54 in December 2020 cost $2.02 at the end of last year, according to the Bureau of Labor Statistics. According to realtor.com, the average rent for a home with up to two bedrooms increased from $1,424 at the end of 2020 to $1,713 at the end of last year.
America Saves, a nonprofit campaign of the Consumer Federation of America, offers guidance here.
Since the pandemic, some monthly service providers have become more open to negotiating bills — whether for utilities, phone service, cable, internet or car insurance. These calls can lead to significant savings, said Kia McCallister-Young, president of America Saves. Call to ask about the lowest rate and available discounts and coupons, she advises. If a provider is competitive with other companies, the chance of a discount is greater.
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