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Stagnant wages coupled with high inflation and fears of a looming recession have driven consumers to rely more on credit cards to pay for unexpected expenses. But as interest rates continue to soar, many are having trouble keeping up with payments.
According to multiple reports, credit card debt delinquencies are taking off, following two years of historically low rates. But consumers are not giving up easily. More than 90 percent are actively looking for ways to get out of debt, even if things are tight.
Credit card debt balances and delinquencies rising amid tough macroeconomic conditions
A recent survey by CreditCards.com found that 72 percent of those who carry credit card debt have added to their balances over the last year. While rising costs are mostly to blame, soaring interest rates and income disruptions have also played a key role in consumers’ increased balances.
The survey’s findings are consistent with the Federal Reserve’s latest report, which puts credit card debt at $986 billion — beating the pre-pandemic high of $927 billion. The biggest concern, however, is that as balances have continued to grow, so have the number of delinquent accounts.
“Although historically low unemployment has kept consumer’s financial footing generally strong, stubbornly high prices and climbing interest rates may be testing some borrowers’ ability to repay their debts,” Wilbert van der Klaauw, economic research advisor at the New York Fed, said in a statement, referring to the 0.6 percentage point increase in credit card delinquencies.
Experts at TransUnion have also weighed in on the subject, expecting this trend to continue throughout the remainder of 2023, as we head into a possible recession.
“Credit card balances are forecast to rise over the course of the year as many consumers continue to turn to cards to help them manage cash flows,” Paul Siegfried, senior vice president and credit card business leader at TransUnion said in a statement. “ We expect card delinquency to increase in 2023 as consumers face liquidity shortages from the prolonged high inflation environment, slowing wage growth, and expected increases in unemployment,” he added.
How to pay off credit card debt: The DIY approach
If you’re struggling with credit card debt and looking for ways to shave it off, there are some strategies you can implement to help you achieve relief.
Snowball vs. avalanche method
According to CreditCard.com’s survey, out of the 92 percent of cardholders who are looking to reduce their credit card debt, 61 percent are doing so by paying more than the minimum payment due. If you have disposable income and this is something you’d like to try, there are two ways to go about it.
First, is the snowball method. This payoff strategy consists of paying off your smallest debt first and moving up from there. To do this, list your debts from lowest to highest balance owed — regardless of their interest rate. Then, you’ll apply any extra funds toward the debt with the smallest balance and, once it is paid off, you’ll apply the liberated funds toward the next smallest debt and so forth. The main goal of the snowball method (besides helping you get rid of debt) is to keep you motivated through small wins.
Then, there’s the avalanche method. This payment strategy consists of focusing on paying off the debt with the highest interest rate first and moving down from there. This payoff strategy is best suited if you have multiple cards with very different interest rates. The point of the avalanche method is to help you save more on interest.
0% balance transfer card
Most credit card companies offer balance transfer credit cards, which allow you to take your outstanding balances from other credit card companies and transfer them to this new card, which has a 0 percent introductory rate. This offer can last anywhere from six months to 21 months, depending on the company.
By transferring your credit card balances into a balance transfer card, you’ll be able to tackle debt faster, as you can pay off your principal, without worrying about interest. That said, most companies do charge a balance transfer fee of between 3 and 5 percent of the transferred balance and you’ll need good-to-excellent credit to qualify. Additionally, if your balance isn’t paid off by the time the introductory offer ends, interest rate will apply on any amount that’s left over.
Debt consolidation loan
Debt consolidation is the process of combining multiple debts into a single loan. The goal of this new loan is to make it easier for you to manage your debt, as well as to help you save money on interest by helping you secure a lower rate.
When considering a debt consolidation loan, it’s important to shop around for lenders to see which one will give you the best offer for your situation. Besides that, be on the lookout for application, origination, late payment and other lender fees, as these can easily add up and eat away your savings.
Other options to consider
If the DIY approach isn’t for you, you can always seek professional help to get out of debt. Some options to consider are credit counseling agencies, debt relief companies or debt settlement companies. Although you may be asked to pay a fee in exchange for these services, it could be a great solution if you’re unsure on how to tackle debt yourself or if you have a more complex situation.