Cash may be king, but if that’s true, then credit cards are the ace.
We all seem to be on the lookout for clues that we’re on the verge of another widespread financial crisis.
The memories from the debacle a decade ago are so bad that no one wants to be caught by surprise again.
So many wonder: Is it a sign that a recession is looming because December’s retail sales were weak and just posted the biggest drop in nine years? Should we be focused on worries that the United States will be hurt by a global industrial slowdown? What about student loan debt? Delinquent car loans?
Yet maybe we should tune into what’s next for us, rather than the economy. What are the odds that we could be facing our own personal financial fallout?
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Are you juggling so much debt – and so many bills – that you’re not prepared for your own financial shock? What would happen after a medical emergency? A divorce? A job loss?
Some of the U.S. economic numbers, no doubt, give one reason to pause.
Consumer debt at all-time high
Consumer debt in total hit a little more than $4 trillion – the largest amount ever – as of December, according to the latest data from the Federal Reserve. That includes auto loans, student loans, personal loans and credit cards. But not mortgages.
A record number of consumers – 178.6 million at the end of 2018 – now have access to a credit card, according to a new report by TransUnion.
Nearly 430 million credit cards are in circulation – up nearly 13 percent from the end of 2015.
The average credit-card debt per borrower is $5,736 – up about 7.5 percent from 2015, according to TransUnion.
In the past year or so, 4 million more people gained access to a credit card.
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Paul Siegfried, senior vice president and credit-card business leader at TransUnion, called the uptick a sign of deliberate growth in a fiercely competitive credit-card industry.
“Issuers are very deliberate in how they extend credit based upon the market competition,” Siegfried said.
More subprime borrowers have credit cards
Much of the growth has been driven by a pickup in consumers with subprime credit – those with credit scores of 600 or lower – gaining access to a credit card. Some of that growth involves younger consumers, including millennials, who are opening credit cards and have lower credit scores because they have little credit history.
But Siegfried noted that balance growth was high at the opposite end of the spectrum, too, including consumers with “super prime” credit scores of 781 or higher under the VantageScore 3.0 credit-scoring model.
While serious delinquency rates for credit-card debt – defined as 90 days past due – rose to 1.94 percent, the rates are well below delinquencies during the Great Recession, according to TransUnion.
Going back to the fourth quarter of 2009 – a peak time for financial troubles – the delinquency rate for credit cards was 2.97 percent.
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Siegfried said he wouldn’t call the growth good or bad at this point.
He noted that year-end delinquencies tend to go up for credit cards, as people are juggling various bills during the holidays.
In general, TransUnion sees consumers continuing to have a strong appetite for credit, as well as an overall strong record when it comes to repaying their debt.
Clearly, though, some consumers are feeling more financial pressure.
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Millennials most likely to carry a balance
About 56 percent of those who are carrying balances have been doing so for more than a year, according to that same survey.
Millennials are most likely to carry credit-card debt. The survey said 65 percent of those between the ages of 23 to 38 are most likely to be carrying balances, mainly for day-to-day expenses.
Many times, those who run into financial problems start unraveling because of some unexpected personal problem – not always a big macro-economic shift.
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Some 40 million Americans – or 16 percent of adults – think they will miss at least one credit-card due date in 2019, according to a WalletHub credit cards survey.
“It’s people that have been living paycheck to paycheck and there is this final blow or shock,” said Donna McNeill, chief operating officer for GreenPath Financial Wellness, a national nonprofit based in Farmington Hills.
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While people may be making minimum payments on time, they’re still not on a stable financial footing. The debt keeps building.
“People can get in the cycle of making the minimum payments and still getting deeper and deeper in debt,” McNeill said.
If a credit-card borrower only made the minimum payments on $5,000 of debt, for example, they’d be in debt for more than 18 years and would end up paying $6,372 in interest based on national average interest rates, according to Ted Rossman, industry analyst for CreditCards.com.
Since mid-2018, GreenPath said its seen an increase in client calls and a need for debt-management assistance. The average GreenPath client is managing about $25,000 in debt.
Under a GreenPath debt-management plan, clients reduce interest, pay off principal faster, and aim to get out of debt in four to five years. Plan fees vary, depending on the amount of debt. The average fee is $35 a month. But GreenPath said often the reduction in interest paid makes up for the fee.
Trouble might be triggered by a change in job and income, the federal government shutdown, layoff, medical situation or lifestyle change.
“The personal financial crisis is what’s driving folks seeking assistance,” said David Flores, director of client services for GreenPath.
Many times, people cannot just look only at one type of debt, such as credit cards.
People ages 18 to 44 are most worried about missing credit-card payments, according to WalletHub.
The 45 year-old to 59-year-old demographic is most concerned about their mortgages, according to WalletHub’s research, while those over 59 put tax payments as their biggest worry.
Yet one needs to take into account the entire financial picture – including student loans, auto loans, personal loans, credit cards, tax bills, as well as a mortgage.
“Someone may call us with a ‘pain-point’ but we’re always going to look at the full financial picture,” Flores said.
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How to get on better financial footing
A good starting point is to carefully review how much money is coming into a household and how much is being spent each month – and look seriously into any shortfalls.
Try to pay off credit-card bills with high interest rates – or see if you can negotiate a lower rate. Retail store cards tend to have higher rates than other cards, so pay attention to how you charge purchases.
You want to make sure you pay all bills on time in order to maintain a higher credit score and access to lower-rate loans.
McNeill said consumers should contact creditors before payments are missed, ask for options to reduce interest rate and look into any short-term hardship program.
If all your credit-card bills and loans are due on the 15th every month, it may be wise to ask that a lender change payment date to make your bills more manageable.
It’s also possible to successfully request to get a late fee waived, especially if that’s a first-time experience.
There also may be payment-assistance programs – such as income-driven repayment plans – to deal with student loans as well.
While many study the big headlines – such as layoff news out of General Motors or the federal government shutdown – it’s important to focus on your own financial outlook, too.
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