March 03, 2022
The total amount of unpaid credit card bills grew $52 billion in the last quarter of 2021. That’s the largest quarterly increase since the New York Federal Reserve began tracking this important signal of household financial health.
Needless to say, I am very worried. The recent spike in credit card debt comes after a period when so many households were making great progress on reducing their credit card debt.
Total card debt dropped from $930 billion at the end of 2019 to $770 billion in early 2021. The combination of limited spending opportunities during the worst of the pandemic and federal pandemic stimulus payments are likely the reason for that great progress. But now
we’re back up to $860 billion.
And right now could be an especially bad time to carry credit card debt. Starting as soon as this month the Federal Reserve is expected to start raising the key interest rate it controls—the Federal Funds rate—as part of its strategy to combat the recent rise in the inflation rate. Once the Fed starts to do this, it is likely that credit card issuers will react by raising the interest rate they charge on unpaid balances. And that rate is already plenty high: the average rate is more than 16%.
I realize some households may be using credit cards more because of the spike in the inflation rate. If your spending is for necessities (gas to get to work, groceries) I get it. But if you now have an unpaid credit card balance because you decided during the recent holiday season to spend more on “wants,” I am so not on board.
And don’t tell me what’s done is done. You can do plenty to reduce the damage.
Any time you are shopping for anything, you must stop and ask yourself if it is a need or a want. If something is a need, you then must ask yourself if you are paying the least amount possible for this need. If you need to switch brands, so be it. Every dollar counts.
There are so many opportunities today to take on some gig work. Even if you have a full-time job, I encourage you to add three to five hours (or more!) of gig work with the intention that every penny earned will go toward bigger credit card payments.
If you have a good FICO score of at least 700, you may qualify for a new credit card that will waive all interest for up to 21 months on the money you move from an old card onto the new card. Websites such as nerdwallet.com and bankrate.com have up-to-date lists of the best balance transfer deals. You are to only consider this if you are determined to get out of credit card debt ASAP. There are typically fees to do a balance transfer. But the cost can be well worth it if it means avoiding paying 16%+ interest on your current card.
If you anticipate you won’t be able to pay off the debt quickly, and you don’t qualify for a balance transfer, call up your current card company and ask for a lower interest rate. Surveys have shown that people who ask tend to get a reduction.
It has never made financial sense to carry high-rate credit card debt. And with the prospect that rates will soon be heading even higher, I hope you will take a deep breath and make a conscious decision from this day forward to avoid credit card spending that you can’t pay back quickly.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.