OWe talk to Matt Schulz, Chief Credit Analyst at LendingTree, about the level of debt in the United States and the impact of high inflation and rate hikes on consumer money. Schulz also discusses how consumers may want to invest during this time, as well as buy now, pay later (BNPL) services.
What does the current level of debt look like in the United States and how has it changed during the pandemic?
Debt is rising across the country, and it’s unlikely 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 more than we had at the end of 2019, before the pandemic started, and there’s no reason to think the growth is going to stop anytime soon. If anything, it might speed up.
Where do you see most of the increase/decrease in debt burden over the last few years or over the last year? Is there an area that has surprisingly little growth?
We have seen a major resurgence in credit card debt over the past year. This follows a massive decrease in sales at the start of the pandemic. To their credit, taking advantage of government stimulus and spending cuts, Americans have done a great job of paying off credit card debt through 2020 and into 2021. Card debt has gone from from a record $927 billion in the fourth quarter of 2019 to $770 billion in the first quarter of 2021. Now, however, that debt is back up to $841 billion and is likely to climb.
Auto loan debt has also increased significantly, 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 over the past few months probably won’t be too surprised by this. Mortgage debt also increased, from $9.56 trillion at the end of 2019 to $11.18 trillion in the first quarter of 2022.
What hasn’t changed much? student loan debt, which was $1.58 trillion in the first quarter of 2021 and is now just a tick higher at $1.59 trillion.
How is consumer debt levels impacted by high inflation and rate hikes?
Inflation affects virtually everything. When things get more expensive day by day, people’s financial margin of error shrinks, and it was already miniscule to begin with. Yes, many people had extra cash on hand for much of the pandemic, thanks to government stimulus and overall spending cuts, but for many people that cushion had already shrunk considerably. Inflation has only served to accelerate this even more. This leaves more people more dependent on credit cards and more likely to fall back into debt.
Combined with inflation, the Fed’s rate hikes are a major double whammy on consumers. Higher prices mean budgets don’t stretch as far as they used to. Higher interest rates mean going into debt is more expensive than before. Put the two together, and it puts consumers in a very difficult situation.
Then, when you consider that the Fed is far from done raising rates, things look even more troubling. Add it all up and it means it’s more important than ever to try and reduce that credit card debt as soon as you can. It will only get more expensive if you don’t.
How can consumers anticipate their debts in this environment?
By acting, even if it’s small. The good news is that there are many options. If you have good credit, a 0% balance transfer credit card can be a godsend. These cards can give you 12 to 21 months interest-free on transferred balances, which can lead to huge savings.
If you can’t get a 0% Balance Transfer Card, a low-interest personal loan can also be useful. You won’t find 0% deals with these, but you can find rates that are better than what you’re paying with your current credit card. Another option that many people don’t know about is to simply call your card issuer and ask for a lower rate. 70% of people who requested a lower rate last year got one – with average reductions of 7 percentage points, which is really huge – but hardly anyone asks for it.
Having good credit and a good history with the card certainly helps, but the success rate is so high that it’s clearly not just people with perfect credit who get what they want.
How should they think about investing during this time?
It depends on your personal situation. If you’re young and in the long-term market, you should just sit back, avoid looking at your 401(k) balance, and stay in the market. This can be difficult to do, but it is important. If you pull your money out of the market when it dips, you risk missing out on the growth that comes once the market recovers. Doing this only compounds your losses.
If you are older, the calculation may be a little different. You may not have the luxury of waiting for the next recovery like Gen Z and Millennials. In these cases, it may be a good idea to consult a financial professional for their advice on your next steps. It bears repeating for young investors: time gives you an incredibly powerful advantage over older investors, and it’s an advantage that could be wasted if you pull your money out of the market when times get tough.
Buy Now, Pay Later (BNPL) has recently grown in popularity – what do you think of this relatively new tool?
BNPL can be a great tool, used wisely. The popular four-way payment model is generally interest-free, easy to obtain, and relatively simple to understand. You know how much you have to pay and for how long. This clarity gives it a big advantage over credit cards.
The danger with these loans is that they facilitate overspending. The fact that they are generally easier to obtain than credit cards can be a wonderful thing. This can be a real help for people with little or no credit who may have no other options, but it can also be a double-edged sword. Because they are easy to obtain, it can be easy to accumulate several BNPL loans simultaneously or in a fairly small window. This can make it difficult to manage, especially for people who don’t have a lot of credit management experience.
Is there anything most consumers forget or misunderstand about debt?
I think people in debt are often so focused on paying off that debt, on 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’re done paying off your credit card debt, the next unexpected expense you’ll face will simply have to go straight back to your credit card. It puts you in debt right away.
The best way to break this cycle is to save some money while paying off your debt. Yes, that means it will take a bit longer to fully pay off your debt. Yes, that means you’ll pay a little more interest. However, it also means you might be able to pay the next car repair or vet bill without using your credit card, and that’s a big deal.
What are the major news headlines you follow?
I’ve spent most of my life in central and south Texas, and I’m a relative, so filming in Uvalde, Texas really got to me. This is simply every parent’s worst nightmare, and my heart breaks for the families of all who have been so needlessly lost.
When it comes to financial headlines, I look at the Federal Reserve, the BNPL space, and the state of the American consumer as a whole. I am particularly interested in observing data on consumer late payments. Delinquencies have been at historic lows for years, but they are starting to climb, and I expect them to continue to do so in the months and years to come.
That said, I think it’s also important for people to step away from the news once in a while. These are intense and very emotional times in which we live. It can be easy to get caught up in constantly scrolling and watching the latest news headlines. However, it is extremely important that people get away regularly and decompress. Maybe that means exercising, reading a book, listening to music, meditating, playing games with your kids, or going out with your spouse. Whatever healthy activity helps you escape the sometimes craziness of 2022, you should do more of it. Your body, mind and heart will thank you.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.