Impact of inflation and interest rate hikes on consumer debt

WWe speak to Matt Schulz, Chief Credit Analyst at LendingTree, about US debt levels and how high inflation and interest rate hikes are affecting consumers’ money. Schulz also talks about how consumers may want to think about investing and buy services later (BNPL) during this time.

What is the current debt level in the US and how has it changed during the pandemic?

Debt is rising across the country, and it’s not likely to stop anytime soon. A recent report from the Federal Reserve Bank of New York shows that Americans have $15.84 trillion in household debt. That’s $1.7 trillion up from the end of 2019, before the pandemic hit, and there’s no reason to think growth will stop anytime soon. If anything, it might speed it up.

Where do you see most of the debt load in the last few years or last year? Was there an area that saw surprisingly little growth?

We have seen a strong resurgence in credit card debt over the past year. This follows a massive drop in balances early in the pandemic. To their credit, Americans have taken advantage of government stimulus and reduced spending and have done an excellent job of paying off credit card debt throughout 2020 and into 2021. Now, however, that debt has increased back to $841 billion and is likely to increase.

Auto loan debt has also grown sharply, from $1.33 trillion at the end of 2019 to $1.47 trillion in the first quarter of this year. Anyone who has looked at car prices in recent months will probably not be too surprised. Mortgage debt has also skyrocketed, rising from $9.56 trillion at the end of 2019 to $11.18 trillion in the first quarter of 2022.

What hasn’t moved much? student loan debt, that was $1.58 trillion in the first quarter of 2021 and is now just a tad higher at $1.59 trillion.

How is consumer debt affected by high inflation and interest rate hikes?

Inflation affects practically everything. As things get more expensive by the day, the financial margin for error shrinks, and it was tiny to begin with. Yes, many people had extra cash on hand for much of the pandemic thanks to government stimulus and overall reduced spending, but for many that cushion was already severely shrunk. Inflation only accelerated this further. As a result, more people are more dependent on credit cards and are more likely to get into debt again.

Combined with inflation, the Fed’s rate hikes are a big double whammy for consumers. Higher prices mean budgets aren’t stretching as far as they used to. Higher interest rates mean borrowing is more expensive than it used to be. Putting the two together puts consumers in a really difficult position.

When you consider that the Fed is far from done raising rates, things look even more worrying. All this adds up to mean it’s more important than ever to try to reduce that credit card debt as quickly as possible. It only gets more expensive if you don’t.

How can consumers stay ahead of their debt in this environment?

By taking action, no matter how small. The good news is that there are many options. If you have good credit, a 0% transfer credit card can be a godsend. These cards can give you 12 to 21 months interest free on transferred funds, which can result in huge savings.

If you can’t get one 0% balance transfer card, a low-interest personal loan can also be useful. You won’t find 0% deals on these, but you may find rates that are better than what you pay with your current credit card. Another option that many people don’t know about is simply calling your card issuer and asking for a lower rate. 70% of people who asked for a lower price last year you got one – with an average of 7 percentage points, which is really huge – but hardly anyone asks for it.

Having good credit and a good track record with the card certainly helps, but the success rate is so high that it’s clearly not just people with perfect credit who are making headway.

How should they think about investing during this time?

It depends on your individual circumstances. If you are young and in the market for the long haul, then you should just wait, avoid looking at your 401(k) balance and stay in the market. It can be difficult to do, but it is important. If you take your money out of the market when it’s down, you risk missing out on the growth that comes once the market turns. Doing this will simply amplify your losses.

When you are older, the calculus can be quite different. They may not have the luxury of waiting for the next upswing like Gen Z and Millennials do. In these cases, it can be a good idea to consult a financial expert for guidance on your next steps. It needs to be repeated for younger investors: time gives you an incredibly powerful advantage over older investors, and you risk wasting your money by withdrawing your money from the market during tough times.

Buy now, pay later (BNPL) has become increasingly popular lately – what do you think of this fairly new tool?

BNPL can be an amazing tool if used wisely. The popular pay-in-four model is usually interest-free, easy to get, and relatively easy to understand. You know how much you have to pay and for how long. This clarity gives it a major advantage over credit cards.

The danger with these loans is that they make it easy to overspend. The fact that they’re usually easier to get than credit cards can be a wonderful thing. It can be of real help to people with little to no credit who may not have other options, but it can also be a double-edged sword. Being easy to get, it can be easy to stack multiple BNPL loans at once or in a relatively small window. That can make administration difficult, especially for people who don’t have much experience dealing with loans.

Is there something most consumers overlook or misunderstand about debt?

I think people with debt are often so focused on paying that debt and getting that number to 0 that they can take their eyes off the ball.

For example, I am often asked if someone should save while paying off debt. The answer is absolutely yes if you can afford it. If you don’t have any savings when you pay off your credit card debt, the next unexpected expense you face will have to be charged right back to your credit card. That puts you right back in the debt trap.

The best way to break this cycle is to save a little money while paying off your debt at the same time. Yes, it means it will take a little longer to fully pay off your debt. Yes, it means you pay a little more interest. However, it also means you can potentially pay for that next car repair or vet bill without using your credit card, and that’s a big deal.

What are some of the top headlines you follow?

I’ve lived most of my life in central and south Texas, and I’m a parent, so shooting in Uvalde, Texas really hit me. It’s just every parent’s worst nightmare, and my heart breaks for the families of all those who have been so senselessly lost.

When it comes to financial headlines, I watch the Federal Reserve, the BNPL area and the overall health of the American consumer. I am particularly interested in monitoring consumer late payment data. Arrears have been at historic lows for years, but they are starting to rise and I expect they will continue to do so in the months and years to come.

Aside from that, I think it’s also important for people to stay away from the news from time to time. These are intense, highly emotional times that we live in. It can be easy to get caught up in the constant scrolling of Doom and checking out the latest headlines. However, it is vitally important that people regularly step back and decompress. Maybe that means exercising, reading a book, listening to music, meditating, playing games with your kids, or going on a date night with your spouse. Whatever healthy activity helps you escape the sometimes insane 2022, you should be doing more. Your body, mind and heart will thank you.

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis from a new industry expert each week. We also feature must-see TradeTalks videos from the past week.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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