The United States is facing many economic challenges. Inflation is at a 40-year high. Earlier in the year, the inflation rate was over 8%. In January, it slowed to 6.4%; however, that is still over three times the Federal Reserves targeted rate. In responses, the Fed has raised interest rates many times over the last year to slow the rate of inflation. These rate hikes make all types of borrowing more expensive. As mortgage rate have increased, home sales slow down. We are not seeing as many potential buyers bidding on homes, so price inflation goes down.
Another area where rising interest rate increases financial pain is in credit card rates, which are already some of the highest. Over the last three months of 2022, rates averaged 21.6%, according to Wallet Hub. That is a jump from 18% a year earlier. For consumers not paying their balance in full, this can be very expensive. If your account becomes delinquent, rates could jump another 10%.
We are seeing two other disturbing trends in the credit card market. First, balances are going up. This debt now totals nearly $1 trillion, according to the Federal Reserve Bank of New York, which is an increase of $60 billion over the last three months ending in December. That is a year over year increase of 15.2% and the highest quarterly growth on record going back to 1999. Inflation is certainly an element in these increases, as everything is costing more. It is important to remember that consumer spending is about 70% of the country’s GNP. Any slowdown could have a big impact on jobs. Just this week, Walmart and Home Depot lowered sales guidance going forward.
The other worrying trend is that delinquency is going up. At the end of 2022, 18.3 million borrowers were behind on their credit cards compared to 15.8 million at the end of 2019. The share of credit card users making payments at least every 30 days rose to 5.9% from 5.2% the previous quarter. The more serious delinquencies representing payment made 90 days or more past due increased to 4%, from 3.7%. Younger borrowers are seeing the biggest jumps in past-due accounts. All this is at a time of rising wages and low unemployment.
The president has been pushing for student loan forgiveness, which is currently in front of the U.S. Supreme Court. He has tried to take this controversial action by himself and has delayed required loan payments since the pandemic began. Court challenges are under way. Many citizens think it is unfair to discharge these debts because they either repaid their own obligations or never borrowed from the taxpayers in the first place. If these debts become due again, there could be some far-ranging consequences.
Like all financial considerations, you must have a comprehensive plan in place. Purchases need to be paid for in a timely manner and savings should be in place for planned events such as a vacation. You should never have to buy necessities on a credit card unless you are planning to repay the full amount every month, are only using the card for convenience or to get some kind of reward points.
Most people do not plan to fail, they just fail to plan.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.”
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