Credit card balances saw the largest increase in 20 years. Get ahead of the debt. – MLive.com | Vette Leader

Months of high prices prompted more households to spend on credit cards, adding $46 billion to the national balance in the second quarter of 2022.

There was a 13% year-over-year increase, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data.

Although the second quarter is usually higher, this big jump marks the largest rise in 20 years.

While inflation is at a 40-year record high, wages have not kept up. To make up the difference, more and more people are using lines of credit to fill the gap.

Consumers default on their monthly payments and in turn fall into debt.

High inflation, high interest rates and low wages are an “imperfect storm,” said GreenPath finance wellness coach Jeff Arevalo. Those who have used stimulus checks and pandemic relief to get out of debt are particularly vulnerable.

“Customers who were out of debt a year or two ago have been able to take advantage of some of these relief options, they’re in debt again,” he said.

The Grand Rapids Credit Advisory Service reported a significant increase in their customers’ debts. Last year, the average credit card balance was $10,000. In June, the average balance was $14,000.

According to GOBankingRates, an estimated 14 million Americans nationwide have debts of $10,000 or more.

Add in the rate hikes the Federal Reserve introduced this summer, customers are paying more but taking less strain on their debt, Arevalo said. In late July, BankRate reported that the average interest rate on a credit card balance was 17.25%.

“The bottom line is that people who hold these debt balances are going to pay more interest over the long term,” he said. “Unfortunately, if consumers don’t really rein in this or reduce their balances to counteract this, they’re going to feel that pressure.”

Here’s what financial advisors advise for paying down debt and budgeting for inflation.

Have an accountability partner

Financial wellbeing is about progress, not perfection, said Todd Mora, program manager at Western Michigan University’s Sanford Center for Financial Wellbeing and Planning.

“Similar to losing weight or training for an athletic event like a marathon, it’s more about steady progress than that absolute goal,” he said.

Debt repayment and budgeting are rooted in changing habits. Mora adds that most people are motivated to avoid a loss rather than seek a win.

That doesn’t mean penalizing yourself for overspending a week – Mora strongly advises against it as it’s more likely to derail you – but creating an accountability plan.

Mora finds having a partner most effective. Think of it as a fitness buddy, but for your wallet.

This accountability partner isn’t here to nag you. Mora said clients find success when they write down goals and share them with their partner. If they miss the target, the customer has to do something they see as a loss, like clean their partner’s bathroom or make them dinner.

Beware of “buy now, pay later” options

When shopping online, you may have noticed that companies like Afterpay, Klarna, and Affirm pop up and ask you if you want to pay in installments. If you already have an unpaid balance, be wary of these payment plans, Arevalo said.

Frequently, Arevalo’s clients miss these payments or fail to make them within a specified time frame and are then hit with late fees or deferred interest.

According to a survey by LendingTree, more than 40% of Americans who took out a buy it now loan have made a late payment.

LendingTree called it a “gateway to overspending” after survey results found that nearly 70% of users admit to spending more than they would if they had to pay for everything up front.

“When the budget isn’t really enough to support it [the purchase] From the start, it’s about pushing things further out or kicking the can out into the street,” Arevalo said. “It’s just kind of adding to your existing debt without really having a plan to address it.”

Read the fine print

Debt consolidation loans are also becoming increasingly popular. While they can succeed, they give Mora a break.

“There are a lot of ads on social media [saying] “Oh, debt consolidation will solve your problem,” he said. “In reality, there are so many of these ads because they are very profitable.”

According to NerdWallet’s August data, typical interest rates on debt consolidation loans range from about 6% to 36%. To get this low interest rate, you need a credit score of at least 720.

Mora wouldn’t completely rule out a consolidation, especially if the loan rate is lower than your credit card charges. But it comes down to habits, he said.

“What often happens is people do a debt consolidation and take three credit cards and other debt, consolidate them into one loan, and then they go back and then they get another credit card,” he said. “They didn’t really address the root issue.”

Transferring funds from one credit card to another should also be done with caution. Mora directs clients to find the Schumer box, which must disclose fees, interest rates, and other key funding issues.

Mora said clients need to understand how the interest rate is structured. Ask questions like is there an introductory fee or a fixed fee? Is this a fee or a tariff?

If you’re paying off a credit card balance by applying the minimum payment each month, make sure you calculate how long it’ll take you.

“Debt is a fixed cost. That means you have to pay something. And when your fixed costs go up, you run into the problem that you have less flexibility in your budget,” Mora said.

Debt counseling services like GreenPath and the Sanford Center are free resources that offer phone, online, and in-person options.

This story is part of MLive’s Wallet Watch series, which focuses on today’s current economic issues. Have a suggestion for Wallet Watch? Email us at askaquestion@mlive.com

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