Rebecca Moore really wanted to enjoy the holidays this year and do “everything for” friends and family.
“For me, that meant spending money on quality, thoughtful gifts,” said the 32-year-old digital marketer from New York.
“The problem is, the ‘thoughtful, quality gifts’ I ended up buying cost me more than I expected, so I did the unthinkable,” she said. “I put everything on my credit cards. I’m short on money these days and honestly have no idea how I’m going to pay off this debt, but I gave it a shot anyway.
What a difference a few years make. Once replete with extra savings from the pandemic, many consumers have exhausted that excess cash due to continued inflationary pressures and are now turning to credit cards to fund their vacation expenses.
“Wage growth has been around 5% on average, but inflation is hovering around 7%,” said Ted Rossman, senior industry analyst at and . “Consumers are upside down, basically. This is mainly why sentiment has been so depressed.
When the pandemic hit, demand for credit plummeted due to limited spending opportunities, said financial analyst Richard Barrington, .
“Throughout the lockdowns and beyond, people were reluctant to travel or spend much time in public due to health concerns,” he said.
In the meantime, the federal government has sent stimulus checks to most Americans. With a windfall of cash and limited ways to spend it, Americans’ personal savings rate — defined as the percentage of disposable (after-tax) personal income that is saved — hit an all-time high of 33% in April 2020. It remained high until the end of 2021.
And now? New data from the Bureau of Economic Analysis shows that the personal savings rate in the United States has fallen to 2.3%. It’s a 17-year low.
“People are also reluctant to cut their standard of living and haven’t adjusted their budgets yet, so their first impulse is to borrow,” Barrington said.
The instinct to borrow in these circumstances makes perfect sense, but it’s unfortunate given that borrowing has become significantly more expensive due to rising interest rates, Rossman said. The average rate on a credit card is now 19.55%, according to the latest Bankrate data, the highest it has ever been.
At the start of the year, the average rate on a credit card was 16.3%, according to Bankrate.
“For someone making only minimum payments on $5,000 credit card debt, the rate hikes added seven months to the payback cycle, costing an additional $1,166 in interest,” Rossman said. , while the average APR was 19.4%.
At the same time, Americans are taking on more debt. Sales jumped 15% year-over-year in the third quarter. This is the largest annual increase in more than 20 years.
“We’re back to pre-pandemic levels in terms of credit card balances,” Rossman said. “And those who wear sales wear them for a longer period of time.”
In fact, among Americans who carry credit card debt month-to-month, 60% have been rolling over that debt for at least a year, according to CreditCards.com. That’s up from 50% last year.
Low-income households feel the greatest pressure.
“A greater percentage of those earning less than $50,000 a year struggle to make minimum payments,” Barrington said.
Banks are starting to take notice, but by and large aren’t too worried, Rossman said.
“While we see pockets of struggling households – particularly at the subprime level – the overall picture is still relatively positive. Delinquencies, defaults and the average American’s debt-to-income ratio are all lower. by historic standards,” he said. “Consumers, in general, are in pretty good shape.”
The big wild card: what will happen to the labor market in 2023 as the Fed tries to contain inflation.
“Unemployment will increase, but will it go up to 4.5%? 5%? 6%? The hope is that if there is a recession it will be mild,” Rossman said.
For now, he noted, “those who have been made redundant are finding new jobs quickly and the biggest predictor of whether or not someone will repay their debt is whether or not they have a use”.
Personal finance journalist Vera Gibbons is a former editor of SmartMoney magazine and a former correspondent for Kiplinger’s Personal Finance. Vera, who spent more than a decade as an on-air financial analyst for MSNBC, is currently the co-host of the weekly non-political news podcast she founded, NonPo. She lives in Palm Beach, Florida.
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