The Federal Reserve is today expected to announce a 25 basis-point increase in its target interest rate, which would mark the third such rate hike in the last 15 months. And with credit card debt steadily worsening, this latest increase will cost U.S. consumers roughly $1.6 billion in extra credit card finance charges during 2017, according to WalletHub analysis. This complicates an already bad situation for credit card users, considering that WalletHub expects outstanding balances to break the all-time record in 2017.
Mortgage and auto loan rates are more difficult to predict because they are longer-term borrowing vehicles with fixed rates. But if markets react to today’s expected rate hike like they did to the Fed’s December 2016 move, the following data points may give us a sense of what’s coming:
- The APR on the average 30-year fixed rate mortgage rose from 3.48% in late June 2016 to 4.32% at the end of the year.
- The average APR on a 48-month new car loan rose from 4.25% in August 2016 to 4.45% in November (the most recent data available).
2016 Credit Card Debt Study: Trends & Insights
Credit card debt statistics speak to the financial health of American households and can foretell overleveraging bubbles that may trigger constriction across lending markets. From that perspective, the fact that U.S. consumers racked up $60.4 billion in credit card debt during the fourth quarter of 2016 represents serious cause for concern.
This is the largest fourth-quarter debt increase since 2007 as well as the third-largest in the last 30 years. And it resulted in an $89.2 billion net increase in credit card debt for 2016 as a whole, which is the most for a year since 2007.
Our dismal performance also comes on the heels of three equally foreboding financial feats, appearing to solidify an ominous trend. We set the post-2007 Q3 record last quarter, racking up $21.9 billion in new debt, right after adding a Q2-record $34.4 billion to our tab and recording the smallest Q1 pay-down ($27.5 billion) since 2008.
So it is not a question of whether consumers are weakening financially, but rather how long this trend toward pre-recession habits will last and just how bad it will get. And WalletHub projects that in 2017 we will surpass the current record for outstanding balances by at least $100 billion.
Outstanding credit card debt is at the highest point since the end of 2008, and Q4 did nothing to divert us from a collision course with the $1 trillion mark.
The $60.4 billion in credit card debt that we added in Q4 2016 is nearly 54% above the post-Great Recession average.
We ended 2016 with $89.2 billion in new credit card debt, which is the biggest build-up since 2007 & 145% above the post-recession average.
We now owe almost exactly as much as we did right before the Great Recession officially began. If charge-off rates begin to rise, things could get ugly fast.
With 17 of the last 24 quarters reflecting year-over-year regression in consumer performance, it’s clear that we’ve reverted to pre-downturn bad habits.
The fact that charge-off rates remain near historical lows continues to fuel lenders’ appetites for extending credit, but there will be a tipping point eventually.
Tips For Managing Debt
1. Make a Budget (and Stick to It): It’s difficult to spend within reason or plan savings without knowing how your monthly spending compares to your take-home as well as what it is allotted to. That is why you should rank order your expenses – including debt payments, emergency fund contributions, and other savings – and trim the fat if necessary. And most importantly, once you develop your budget, make sure to stick to it or else you’ll have simply wasted your time.
2. Build an Emergency Fund: With a robust financial safety net, you’ll be less at the mercy of the economy and able to withstand a prolonged period of joblessness, should the need arise. Your goal should be to gradually save about a year’s worth of after-tax income through monthly contributions to an emergency account.
3. Improve Your Credit: This might sound a bit counterintuitive, considering that increased access to credit provides more opportunity to incur debt, but improving your credit standing will have a dramatic impact on the cost of your debt and, thus, how quickly you can pay it off. Better credit can also make it easier to find a job or a place to live – both of which impact your bottom line.
You can determine your starting point and get personalized advice by signing up for WalletHub, which provides free credit scores, full credit reports and various other helpful tools.
4. Try the Island Approach: The Island Approach is a credit card strategy that involves using different cards for different types of transactions, as if they are a chain of distinct yet interrelated islands. For example, you could transfer your existing debt to a 0% credit card in order to reduce your monthly payments as well as get out of debt sooner and subsidize your ongoing spending with a rewards card or two that offer high earning rates in your biggest expense categories. This will enable you to get the best possible collection of terms as well as gain a better perspective on your spending and payment habits since finance charges on your everyday spending cards will signal a need to cut back.
5. Use the Snowball Method to Strategically Pay Off Amounts Owed: In order to become debt free at the least possible cost, you should attribute the majority of your monthly debt payment to the balance with the highest interest rate while making the minimum payment required on the rest. Once your most expensive debt is paid off, repeat the process as necessary with the remaining balances.
6. Evaluate Your Job Situation: In some cases, all the budgeting and planning in the world won’t be enough to solve your debt problems. You may therefore need to evaluate whether there are higher-paying opportunities out there for people with your background or if you’ll need to acquire some new skills in order to make yourself more marketable. This might require making a bit of an investment in yourself, but as long as you get a worthwhile return it’s money well spent.
Net Result of Consumer Credit Card Debt Q1 2008 – Q4 2016
|Net Result in Debt Load||Relative to Same Period
|Relative to Same Period Two Years Ago|
Net Result in Debt Load – Green indicates that consumers decreased their debt relative to