Debt has been climbing ever since pandemic-related benefits came to an end. Today, two out of three Americans are living paycheck-to-paycheck, only one emergency away from bankruptcy.
Those affected are the people most adversely impacted by inflation, which lately seems to have stalled out in the struggle to reduce it to the Fed’s long-term target of 2 percent.
Credit Cards
Credit cards are becoming a significant issue for many people. Recent reports indicate that credit card debt in the United States has reached record levels, with Americans collectively owing $1.21 trillion. This increase is driven by factors like stubborn inflation and high borrowing costs, which have made it difficult for many to manage their debt.According to the Federal Reserve Bank of New York, almost 9 percent of credit card unpaid balances became delinquent over the past year.
This category has been steadily increasing over the past two decades. With higher delinquencies come higher defaults. With higher defaults, lenders are having to write off more as bad debt. In the first nine months of last year alone, lenders wrote off $46 billion. That’s the highest number of defaults since 2010, as households were staggering out of the Great Financial Crisis that began in 2008.
With an average interest rate of 22 percent, credit card interest is making it challenging to save money. For many people, it’s making it challenging just to purchase necessities.
As a result, more people are putting those necessities on credit cards, with almost a quarter saying they’re turning to credit card use more in response to cost-of-living increases, according to a new report.
While credit cards can offer short-term relief, they can also lead to long-term debt problems due to high interest rates.
How to Manage Credit Card Debt
If you are struggling with credit card debt, there are some concrete steps you can take to ensure you don’t fall behind on your monthly payments, risk falling into delinquency or damage your credit score.Stick to a Budget
The more time and thought you invest in the development of a budget, the more you’re likely to become disciplined in terms of reducing spending and increasing savings. Credit cards are sinister in the sense that immediate gratification won’t be followed by immediate financial obligation, just as eating too much chocolate pie won’t immediately show up on your scale.Prioritize Credit Card Payments
Since interest rates on credit cards are high, today averaging about 22 percent, carrying a balance on your card can lead to a vicious cycle of spending and debt that can be difficult to break out of.Investigate Debt Consolidation
Consolidating your debts can result in reduced total interest charges. This can be done through debt consolidation loans or transferring credit card balances from one card to another. What you save in interest expense can then go into your savings account.Avoid Impulse Purchases
The temptation to spend is maximized and is everywhere, with advertisements and promotions tailored to appeal especially to the younger and less-informed crowd. Seemingly small impulse purchases can become bad habits that add up—and when you finally realize what has happened to your finances, you’re already in financial trouble.Auto Loans
The 60-plus-day delinquency rate of subprime auto loans rose to 6.15 percent in December 2024, a new record, according to data from Fitch, which tracks subprime auto-loan asset-backed securities (ABS), going back to their origins in the early 1990s. Subprime delinquency rates rose to record highs in 2023. They rose further in 2024, and the trend is expected to continue going up.Economic Factors
Rising inflation and higher interest rates are making monthly payments increasingly challenging, leading to higher delinquency rates. This could worsen significantly if we enter recession and unemployment rises.Vehicle Prices
The increasing cost of vehicles means borrowers often take out larger loans. significantly. The average new vehicle cost today comes in at almost $50,000, adding even more financial strain.Loan Terms
Longer loan terms can increase the risk of delinquency. Borrowers may struggle to keep up with payments over extended periods, especially if they face unexpected financial challenges.As credit card delinquencies and defaults have been rising, according to data from the Federal Reserve, auto loan delinquencies have been rising steadily over the last three years.
Consumer Behavior
Changes in spending habits, such as prioritizing essential expenses over loan payments, can lead to delinquencies. Additionally, deferring payments or extending loan terms can result in a buildup of debt.How to Manage Auto Loan Debt
When it comes to managing auto loan debt, several approaches are recommended that are similar to those suggested for credit card debt, such as creating a detailed budget.You may need to prioritize your debt payments in general to make the auto loan payments your priority. This is important to protect your credit score. It’s best to set up auto-payments and then forget about them.
Cutting back on non-essential expenses and putting that reduction in your savings account is wise. Or, redirect the money you saved toward paying off your auto loan faster or adding to savings. If your credit score is solid, consider refinancing your auto loan at a lower interest rate.
Whenever possible, make extra payments toward the principal amount of your loan. This will help reduce the overall interest you pay and shorten the loan term.
Summary
Try to avoid taking on additional debt while you’re working to pay off existing credit card and or auto loan debt.Focus on one debt at a time to make meaningful progress.
If managing your debt feels overwhelming, consider seeking advice from a financial adviser or credit counselor. These professionals can provide personalized guidance based on your financial situation.
