By Cora Lewis —
The Associated Press
For Americans who lacked savings before the pandemic, financial stress is increasing.
A combination of inflation, rising interest rates and the end of pandemic-related relief such as the moratorium on student loan payments have led to record credit card debt
, experts say .
In the fourth quarter of 2023, Americans added $1.13 trillion to their credit cards and aggregate household debt balances increased by $212 billion, an increase of 1.2%, according to the latest data from the Federal Reserve. NY.
Delinquencies are also increasing.
In December, 3.1% of outstanding debt was in some state of delinquency, 0.1 percentage points more than in the third quarter.
The New York Fed report also found that 6.4% of credit card debt was delinquent for 90 days or more, up from 4% in the final quarter of 2022.
“The transition of credit cards and auto loans into delinquencies continues to rise above pre-pandemic levels,” said Wilbert van der Klaauw, economic research adviser at the New York Federal Reserve.
“
This indicates increased financial stress
, especially among younger and lower-income households.”
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The average interest rate on a given credit card is now about 21.5%,
the highest since the Federal Reserve began tracking rates in 1994.
Silvio Tavares, president and CEO of VantageScore, one of the country's two main credit scoring systems, said that "the reality is that there are starting to be some significant signs of stress," even though consumers generally enjoy good financial health.
If you're facing increasing credit card debt, while also feeling the continued effects of inflation, here's what you should consider:
Request a rate reduction
One of the first things you should do is ask your credit card company to lower your rates.
While the Federal Reserve signaled Wednesday that its 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 transfer your balances to low- or no-interest cards, at least for the first year.
These promotions can help prevent debt from accumulating.
That said, you may have to pay a balance transfer fee and pay off the balance before a given promotional period ends, or face additional interest.
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What's more, banking industry confidence reports show that banks are becoming increasingly conservative in the loans they make, meaning refinancing may become more difficult.
Pay off the highest interest debt first
Known as the
avalanche approach
, paying off debt that accrues interest the fastest will always be more efficient than paying off lower-interest debt first.
This is the most financially sound debt management method.
Another way, known as
the snowball approach
, considers the psychological rewards of paying off small debts first, which can boost morale, before tackling larger debts.
Some financial advisors find this method more motivating.
You can find nonprofit credit counseling through the National Foundation for Credit Counseling at nfcc.org.
Consolidate loans and reduce your student loan payment
Whenever possible, advisors also encourage consumers to consolidate loans at fixed rates when available.
The Federal Trade Commission's consumer counseling guide to getting out of debt can help you make a plan.
When it comes to student loan payments, also make sure that all of those debts are consolidated and that you take advantage of every possible way to reduce that monthly cost.
The public service loan forgiveness program is one of several avenues of relief still available to many people with student debt.
Other sources for borrowers include: false certification, borrower defense, school closed, total/permanent disability discharges, and alternative repayment programs such as income-based repayment.
Budget for inflation
Inflation has slowed from its peak, but the cost of many goods and services remains high: a loaf of bread that cost $1.54 in December 2020 sold for $2.02 at the end of last year, according to the Bureau of Statistics. Labor.
The median rent for a property with up to two bedrooms increased from $1,424 at the end of 2020 to $1,713 at the end of last year, according to realtor.com.
Since the pandemic, some monthly service providers have become more open to negotiating bills, whether it's utilities, phone service, cable, internet or auto insurance.
Making these calls can result in significant savings, according to Kia McCallister-Young, director of America Saves.
If a supplier is competitive with other companies, there are greater chances of obtaining a discount, the expert added.