Content agency Terry Savage Tribune
The good news is that inflation is falling. The bad news is that prices are still 8.5% higher than a year ago. And the scary news is that many consumers are coping with rising prices by increasing their credit card debt.
The proof is in the statistics. Outstanding credit card balances increased by $46 billion in the second quarter of 2022, a 5.5% increase from the first quarter of this year. And credit card balances grew by $86 billion in 2021, a 20-year high.
Clearly, many consumers finance even the most basic purchases with credit cards. This happens as interest rates rise. And since card rates are tied to overall Fed rate increases, those financial burdens will soon become heavier.
Currently, the average rate charged on credit card balances is 17.13%, up from just over 16% a few months ago. But many highly indebted consumers are paying interest of 24% or more. Once card issuers realize you’re hooked, they can easily raise rates.
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Of course, card issuers say they are worried about possible defaults, bankruptcies and charge-offs if the economy hits a deep recession. That’s why they’re setting aside reserves and raising rates.
Given that Americans now have more than $840 billion in credit card balances (near the pre-pandemic high of $930 billion), this interest is enriching card issuers. And that makes borrowers poor.
If you’re worried about the impact of 8.5% inflation on your budget, you definitely need to be aware of the impact of double-digit credit card interest.
Here’s what you can — and should — do now to save your finances:
- Pay off your balances. If you only pay the minimum amount required each month, it may take you 30 years to get out of debt. Since jobs are still plentiful, take a part-time service job to earn extra money. Seniors who can’t work might consider adding a paying roommate or after-school daycare for a working mom.
Put the “extra” money towards your balances using this plan: take that month’s minimum payment and double it. Write down this number and pay the same amount each month. Don’t charge another penny on the card. Following this plan will clear your balance in less than three years.
- Use a balance transfer card to find a lower rate and a short interest-free grace period. You can find the best deals on a balance transfer card at Creditcards.com.
But beware. Take advantage of this grace period to pay off your debt quickly. When it expires, rates will quickly climb much, much higher.
- Review your monthly charges. It’s time to review all those automatic subscription payments for online services. You can live without so many of them, saving a small fortune.
- Get trusted advice. Avoid expensive services that promise to negotiate with your creditors. They usually ask you to stop paying on the cards, putting money aside in an account that allows them to make an offer. But in the meantime, your credit is ruined.
Instead, contact the nonprofit National Foundation for Credit Counseling (NFCC.org) at 800-388-2227. You will be connected to the nearest local member agency. You can even do consultations over the phone.
There is a significant reward for paying off your credit card balances. Not only does it save you a fortune in interest; if done correctly, this payment will get you a new, lower rate card to use when needed. Your credit score will increase rapidly as your outstanding balances decrease.
Attack your debt now with an organized plan. Everyone – especially the Federal Reserve – hopes that a painful recession can be avoided as long as inflation is kept under control. But being buried in debt will inevitably create your own personal recession. And that’s the wild truth.
Terry Savage is a Registered Investment Advisor and the author of four bestselling books, including “The Savage Truth on Money”. Email him at email@example.com.