Credit card debt took a nosedive in the early days of the pandemic in 2020 as consumers stayed home, lost work and received cash infusions from the government.
Two years later, it’s back.
Credit card debt increased 15% year over year — the largest one-year increase in more than two decades, according to the Federal Reserve Bank of New York’s quarterly report on household debt and credit released today. Its total of $930 billion is near pre-pandemic levels.
The report found one group of consumers has surpassed its debt average since December 2019, before the pandemic: those in the lowest income areas. Meanwhile, consumers who live in high-income areas have average balances that are $300 lower than in December 2019.
Credit card debt has been rising all year, according to the New York Fed, and its researchers chalk up the increases to a few possibilities:
Consumers are no longer putting off “services” purchases like vacations and travel.
Higher prices of goods and services because of inflation.
People aren’t slowing consumption of goods and services despite inflation.
New York Fed researchers say they expect to see credit card debt increase as it usually does heading into the holidays.
Debt is higher than pre-pandemic levels, according to the New York Fed’s report. It increased by $351 billion, or 2.2%, in the third quarter of 2022 and now sits $2.36 trillion higher than at the end of 2019.
That’s good news for lenders and less of a celebration for consumers. What consumers can rally around is a lack of a significant uptick in delinquencies, which remain below historical trends, the report found. Researchers at the New York Fed largely chalk that up to excess savings still bolstering some borrowers. The percentage of consumers with debt in collections still remains lower than pre-pandemic levels.
Here’s what’s happening with other types of debt, according to the New York Fed’s findings:
Mortgages make up 71% of all outstanding household debt balances compared with 69% in 2019. New York Fed researchers say the refinancing boom in housing is over because of increasing interest rates, and what is left are purchases. New mortgage originations have slowed to pre-pandemic levels. Total mortgage debt is $11.67 trillion.
Student loans — the majority of which are federal loans that have been paused since March 2020 — saw slight balance declines likely due to discharges through existing loan forgiveness programs such as Public Service Loan Forgiveness. The pause is expected to lift next year. Total student debt stands at $1.57 trillion.
Auto loan balances continued to increase in the third quarter on a consistent 11-year upward trend, but the number of originations (i.e., cars being bought) has decreased since the previous quarter. New York Fed researchers say those who may be struggling likely bought a car recently, and the price would have been inflated compared with that of past years. Younger borrowers, ages 18 to 29, are struggling most with auto loan payments. Total auto loan debt is $1.52 trillion.
Home equity line of credit, or HELOC, balances increased for the second consecutive quarter after years of decline. Total HELOC debt is $322 billion.
___
So you missed the tax-filing deadline. Now what?
AP Photo/John Raoux, File
Upon paying off between $12,000 and $15,000 in credit card debt in 2019, Yamiesha Bell, a special education teacher in New York, didn’t break up with her credit cards.
With goals to buy a car and a house, Bell hoped to preserve her credit history by keeping her cards open and active.
“I needed to sustain my credit in order to get the interest rates I wanted in the future,” she says.
While credit cards aren’t ideal for everyone, they can aid your credit journey if used responsibly. When reconciling with credit cards, you need a personalized stay-out-of-debt plan. Here are a few strategies to consider.
AP Photo/John Raoux, File
Upon paying off between $12,000 and $15,000 in credit card debt in 2019, Yamiesha Bell, a special education teacher in New York, didn’t break up with her credit cards.
With goals to buy a car and a house, Bell hoped to preserve her credit history by keeping her cards open and active.
“I needed to sustain my credit in order to get the interest rates I wanted in the future,” she says.
While credit cards aren’t ideal for everyone, they can aid your credit journey if used responsibly. When reconciling with credit cards, you need a personalized stay-out-of-debt plan. Here are a few strategies to consider.
Maybe you ditched debt, but history can repeat if you don’t unpack the motivations that contributed to it. A get-out-of-debt plan that works in the short term may not be sustainable over the long term if it doesn’t align with your priorities, according to Julia Kramer, a financial behavior and leadership consultant at Signature Financial Planning in Pennsylvania.
Kramer suggests tracking transactions dating back a week or more. Add a plus sign next to those purchases you’re willing to repeat and a minus sign next to those you’re not. For obligatory purchases like gas and groceries, add an equal sign.
Note the date, the item purchased, the amount and the need the purchase met. Those frequent lattes or meals out with friends may be more about the personal connection experienced, or something else, as opposed to the gratification provided by the item, according to Kramer.
This information is key to identifying areas in your budget that are negotiable. For example, you may be more willing to choose budget-friendly food in order to keep a facial that meets an internal need for self-care and connection, Kramer says.
If your spending strays upon experiencing feelings like anxiousness or boredom, make a plan for those occasions. It might mean budgeting extra money or employing tricks like using a credit card lock feature to prevent spending.
Maybe you ditched debt, but history can repeat if you don’t unpack the motivations that contributed to it. A get-out-of-debt plan that works in the short term may not be sustainable over the long term if it doesn’t align with your priorities, according to Julia Kramer, a financial behavior and leadership consultant at Signature Financial Planning in Pennsylvania.
Kramer suggests tracking transactions dating back a week or more. Add a plus sign next to those purchases you’re willing to repeat and a minus sign next to those you’re not. For obligatory purchases like gas and groceries, add an equal sign.
Note the date, the item purchased, the amount and the need the purchase met. Those frequent lattes or meals out with friends may be more about the personal connection experienced, or something else, as opposed to the gratification provided by the item, according to Kramer.
This information is key to identifying areas in your budget that are negotiable. For example, you may be more willing to choose budget-friendly food in order to keep a facial that meets an internal need for self-care and connection, Kramer says.
If your spending strays upon experiencing feelings like anxiousness or boredom, make a plan for those occasions. It might mean budgeting extra money or employing tricks like using a credit card lock feature to prevent spending.
If you want to reel in spending on categories like dining out or entertainment, for example, set aside physical cash to stay within budget. Money in hand can lead to more mindful spending, according to Kramer.
If you want to reel in spending on categories like dining out or entertainment, for example, set aside physical cash to stay within budget. Money in hand can lead to more mindful spending, according to Kramer.
Create a tracking system that works for you. Setting up spending alerts on a credit card account can notify you if purchases exceed a certain amount. Tracking spending with a spreadsheet, bullet journal or budgeting app, for instance, can also help with mental accounting.
“I would not open up credit cards if you do not have a system in place where you track spending every month,” Kramer says. “It has to be something that appeals to you that you know you’re going to do.”
For Bell, a cash envelope tracking system helps her manage spending in different categories, including her credit card bill payment.
“When you look in a cash envelope and you see you only have $50, it’s very clear that once that money runs out there’s nothing else I can do,” she says.
Create a tracking system that works for you. Setting up spending alerts on a credit card account can notify you if purchases exceed a certain amount. Tracking spending with a spreadsheet, bullet journal or budgeting app, for instance, can also help with mental accounting.
“I would not open up credit cards if you do not have a system in place where you track spending every month,” Kramer says. “It has to be something that appeals to you that you know you’re going to do.”
For Bell, a cash envelope tracking system helps her manage spending in different categories, including her credit card bill payment.
“When you look in a cash envelope and you see you only have $50, it’s very clear that once that money runs out there’s nothing else I can do,” she says.
Ease your way back into credit cards with small planned purchases, like a subscription service payment.
After paying off debt, Bell only uses credit cards for in-budget purchases, and she pays them off in full each month to avoid interest charges. Initially, she left her credit card at home to avoid relying on it.
Ease your way back into credit cards with small planned purchases, like a subscription service payment.
After paying off debt, Bell only uses credit cards for in-budget purchases, and she pays them off in full each month to avoid interest charges. Initially, she left her credit card at home to avoid relying on it.
An emergency fund of even $500 for a car or home repair may keep debt off of your credit cards. Start small and aim, eventually, to cast a wider safety net over time — ideally, three to six months of living expenses stowed in a high-yield savings account.
If you previously got used to budgeting a certain amount each month to pay creditors, keep that momentum going, but direct funds toward savings instead.
An emergency fund of even $500 for a car or home repair may keep debt off of your credit cards. Start small and aim, eventually, to cast a wider safety net over time — ideally, three to six months of living expenses stowed in a high-yield savings account.
If you previously got used to budgeting a certain amount each month to pay creditors, keep that momentum going, but direct funds toward savings instead.
Convenient payment options can sometimes lead to mindless spending. By entering payment information into forms for every online purchase, you’ll have more time to think through a purchase.
Convenient payment options can sometimes lead to mindless spending. By entering payment information into forms for every online purchase, you’ll have more time to think through a purchase.
A nonjudgmental partner or trusted loved one can offer input on a purchase or a stay-out-of-debt plan. An accountability partner can be a sounding board that lets you listen out loud to your own justifications for financial decisions.
A nonjudgmental partner or trusted loved one can offer input on a purchase or a stay-out-of-debt plan. An accountability partner can be a sounding board that lets you listen out loud to your own justifications for financial decisions.
As motivations and priorities change, your stay-out-of-debt plan should follow. Continue revisiting credit card statements to identify the needs that are being met by purchases and which are most important.
If in this process you continue having frequent run-ins with debt, consider closing credit card accounts even if it can negatively impact credit scores.
“A big thing about this is knowing yourself and knowing what your challenge areas are and finding ways that work around them,” Bell says. “Five years from now it might look different, but for right now that’s what works.”
As motivations and priorities change, your stay-out-of-debt plan should follow. Continue revisiting credit card statements to identify the needs that are being met by purchases and which are most important.
If in this process you continue having frequent run-ins with debt, consider closing credit card accounts even if it can negatively impact credit scores.
“A big thing about this is knowing yourself and knowing what your challenge areas are and finding ways that work around them,” Bell says. “Five years from now it might look different, but for right now that’s what works.”
