Despite inflationary levels that have since reached a 40-year high, combined with rising interest rates, consumer debt has risen to record levels, according to the latest report by the Federal Reserve. In fact, such debt and credit increased 1.7 percent in the first quarter to nearly $16 trillion. Here’s why consumer debt is increasing, and what you can do about it.
A Wider View
During the three-month period, credit card balances dropped by $15 billion but still stood at $17 billion – 9 percent more compared with the same period last year. During the same period, auto loan originations dipped after a year in which the cost of vehicles jumped by almost 27 percent. Further, student loan debt rose to $14 billion, which brings the yearly hike to 6.5 percent.
Why is Consumer Debt Rising?
The increase in overall household borrowing was driven mainly by a $250 billion rise in mortgage debt, which in early May was $11.18 trillion. That figure marks a year-over-year increase of 10 percent.
What’s significant is that the rise in overall debt occurred as consumer price inflation rose over 2021 through March and with interest rates soaring to new highs. The CPI is a measure of the average change over a period in prices paid by urban consumers for consumer goods and services. In June, the index increased 1.3 percent, seasonally adjusted, and jumped 9.1 percent over the last 12 months, with no seasonal adjustment, according to the Bureau of Labor Statistics.
Thirty-year mortgage rates in May were hovering at about 5 percent – up from 3 percent in the year-ago period. Mortgages comprise 71 percent of overall household debt, a figure that continues to increase.
Since the pandemic’s onset, U.S. households through May originated $8.4 trillion in new mortgage obligations. Lending Tree cites as a cause a significant hike in the number of households that moved out of cities and into suburbs. Such relocation dovetails with continued price increases. In the last two years, the median cost of new homes rose 30 percent to $428,700.
As rates are increasing, though, the refinance explosion that coincided with dropping mortgage rates is slowing, according to the New York Fed. To offset climbing inflation, and combat growing debt in America, the Federal Reserve has green-lit a couple of rate hikes so far this year and will likely approve more. The annual U.S. inflation rate soared to 9.1 percent last month, from 8.6 percent in May, the highest rate since November of 1981.
Higher Prices and Consumer Debt
With prices creeping ever upward almost across the board, U.S. consumers are increasingly relying on their credit cards, with no end is in sight. In fact, as the Feds raise interest rates, it will get more and more expensive to carry a balance.
While credit card balances did dip during the first quarter, they jumped year over year, hitting $841 billion. As it is, 229 million more credit card accounts were established from January through March, an increase from the previous quarter and more than levels posted prior to the pandemic.
In May, APRs were slightly more than 16 percent, on average. By the year’s end, many economists believe rates will surpass 18 percent. Should that occur, it would be a record. The current record is 17.87 percent, which was established in April of 2019.
How to Deal with Rising Credit Card Balances
If you have a credit card balance, your options include asking your credit card issuer for a reduced rate. If you have a solid credit score, you could also try debt consolidation to pay off high-interest credit cards. You could use a lower-interest personal or home equity loan or apply for a 0-percent interest balance transfer card, onto which you can shift your card balances. Because the card’s interest rate will go back up in a year to 18 months, you’ll have to pay off your new card before then.
If your credit card situation is severe, you may want to get help from Freedom Debt Relief, a top-rated debt-relief leader. Also called debt settlement, debt relief involves hiring a reputable agency such as FDR to negotiate with your credit card issuers to get them to accept less than what you owe to settle your debt in full. Negotiations begin once you’ve saved a pre-determined sum that will be used as leverage. Card companies typically go along because they know that if you file bankruptcy, they may wind up with nothing.
So, yes, consumer debt continues to increase, and may reach historic levels, but the good news is that, in addition to watching your spending, you have options to deal with credit card balances.