Since the end of the COVID-related welfare programs, Americans’ debt has been on the rise. Currently, two-thirds of Americans are living paycheck to paycheck, just one step away from bankruptcy. A single emergency could push them into financial ruin.
The most affected are those who have been hit hardest by unfavorable inflation. The recent slowdown in inflation seems to have come to a halt, even though the Federal Reserve is still working to bring the inflation rate down to its long-term target of 2%.
How severe is the debt issue? What can we do to address it? On a personal level, what can you do to avoid bankruptcy?
Credit card debt is becoming a major issue for many. Recent reports show that credit card debt in the United States has reached record levels, with Americans owing a total of $1.21 trillion. This increase is driven by stubborn inflation and high borrowing costs, making it difficult for many to manage their debt.
According to data from the New York Federal Reserve Bank, nearly 9% of credit card balances have been overdue in the past year.
Over the past twenty years, this category of debt has been steadily increasing. The higher the delinquency rate, the higher the default rate. As the default rate rises, lenders have to write off more debt as bad loans. In just the first nine months of last year, lenders wrote off $46 billion. This is the highest default figure since 2010, when American households were struggling to recover from the global financial crisis that began in 2008.
The average interest rate on credit cards is as high as 22%, making saving money extremely difficult. For many, this even makes purchasing essential items very challenging.
Therefore, according to a new report, more and more people are starting to use credit cards to buy necessities, with nearly a quarter of people stating that they are using credit cards more to cope with rising living costs.
Though credit cards can provide short-term relief, their high interest rates can also lead to long-term debt issues.
If you are struggling with credit card debt, there are concrete steps you can take to ensure you do not fall behind on monthly payments, avoiding default status or damaging your credit score.
The more time and thought you put into budgeting, the more likely you are to reduce expenses and increase savings. The insidious nature of credit cards is that the immediate gratification does not bring immediate debt, just like eating too much chocolate doesn’t immediately lead to weight gain.
Due to the high interest rates on credit cards, currently averaging around 22%, carrying a balance on the card can lead to a difficult cycle of consumption and debt that is hard to break free from.
Credit card interest is classified as a “waste cost,” similar to traffic fines and bank fees. These do not generate any wealth. As waste costs rise, your standard of living at your current salary level will decrease. So, quickly pay off credit card debt, preferably in full!
Consolidating your debt can reduce total interest costs. This can be achieved through debt consolidation loans or transferring credit card balances from one card to another. The interest cost savings can then be deposited into your savings account.
The temptation of consumption is everywhere, with advertisements and promotions tailor-made for young and information-deficient demographics. Seemingly small impulse purchases can gradually turn into bad habits, and before you know it, you may find yourself in financial trouble when you finally realize your financial situation.
According to Fitch’s data, as of December 2024, the delinquency rate on subprime auto loans of 60 days or more has risen to 6.15%, setting a new record. This data tracks subprime auto loan asset-backed securities (ABS) dating back to the early 1990s. Subprime delinquency rates hit a historic high in 2023, and in 2024, they further increased, with this trend expected to continue rising.
Multiple factors are painting a potentially catastrophic financial picture for auto loans.
Rising inflation and higher interest rates are making monthly payments increasingly difficult, leading to higher delinquency rates. If we enter an economic recession with rising unemployment, this situation could significantly worsen.
The increase in vehicle costs means borrowers often need to take out larger loans. Today, the average cost of a new car is close to $50,000, adding more pressure on finances.
Longer loan terms may increase default risks. Borrowers may struggle to make payments on time over longer terms, especially when facing unexpected financial challenges.
According to the Federal Reserve Bank’s data, as credit card delinquency and default rates increase, the delinquency rate on auto loans has been steadily rising over the past three years.
Borrowers with lower credit scores (subprime borrowers) are more likely to fall into delinquency due to their higher financial risk.
Changes in consumer habits, such as prioritizing essential expenses over loan repayments, may lead to delinquency. Additionally, delaying payments or extending loan terms can contribute to debt accumulation.
When managing auto loan debt, you should take a similar approach as with credit card debt, such as creating a detailed budget.
You may need to prioritize your debt payments overall, making auto loan payments a priority. This is crucial for protecting your credit score. Setting up automated payments is recommended so you won’t have to worry about missing payments.
Reducing non-essential expenses and depositing the saved money into a savings account is wise. Alternatively, use the saved money to pay off auto loans faster or increase savings. If your credit score is good, consider refinancing the auto loan at a lower interest rate.
Whenever possible, make extra payments towards the loan principal. This will help reduce the total interest you pay and shorten the loan term.
If you’re having trouble making payments, contact your lender. They may offer options like loan modification, deferment, or temporary payment reduction.
While working to repay existing credit card and/or auto loan debt, try to avoid taking on additional debt.
Focus on paying off one debt at a time to make tangible progress.
If managing debt feels overwhelming, consider seeking advice from a financial advisor or credit counselor. These professionals can provide personalized guidance based on your financial situation.