Credit card balances have seen the largest increase in 20 years. Get ahead of your debts.

Months of high prices pushed more households to charge credit card expenses, boosting the national balance by $46 billion in the second quarter of 2022.

Compared to last year, there was a 13% increase, according to the Center for Microeconomic Data at the Federal Reserve Bank of New York.

Although the second quarter is generally higher, this significant jump marks the largest increase in 20 years.

While inflation has reached a 40-year high, wages have not kept pace. To make up the difference, more people are using lines of credit to fill the gap.

Consumers fall behind on their monthly payments and in turn find themselves in debt.

High inflation, high interest rates and low wages are an “imperfect storm,” said Jeff Arevalo, financial wellness coach at GreenPath. People who have used stimulus checks and pandemic aid to get out of debt are particularly vulnerable.

“Clients who were debt free a year or two ago, they were able to take advantage of some of these help options, they’re in debt again,” he said.

The Grand Rapids Credit Counseling Service has seen a significant increase in the amount of debt its clients have. Last year, the average credit card balance was $10,000. In June, the average balance was $14,000.

Nationally, an estimated 14 million Americans have debt of $10,000 or more, according to GOBankingRates.

Add to that the interest rate hikes the Federal Reserve implemented this summer and customers are paying more but doing less damage to their debt, Arevalo said. At the end of July, BankRate reported that the average interest rate on a credit card balance was 17.25%.

“Ultimately, people who hold these debt balances will pay more interest in the long run,” he said. “Unfortunately, if consumers don’t really get this under control or reduce their sales to counter this, they’re going to feel this pressure.”

Here’s what financial advisors advise for paying down debt and budgeting for inflation.

Have a responsible partner

Financial wellness is about progress, not perfection, said Todd Mora, program director at Western Michigan University Sanford Center for Financial Wellness and Planning.

“Like losing weight or training for certain types of sporting events like a marathon, it’s more about the progress you make on a regular basis than that absolute goal,” he said.

Debt repayment and budgeting are rooted in changing habits. Mora adds that most people are motivated to avoid a loss rather than seek a gain.

This doesn’t mean punishing yourself for spending too much of a week – Mora strongly advises against this as it’s more likely to derail you – but rather putting an accountability plan in place.

Mora finds it more effective to have a partner. Think of it as a gym buddy but for your wallet.

This responsible partner is not there to harass you. Mora said clients are successful when they write down goals and share them with their partner. If he doesn’t achieve his goal, then the client must do something he considers a loss, such as cleaning his partner’s bathroom or cooking him dinner.

Beware of “buy now, pay later” options

While shopping online, you may have noticed that companies like Afterpay, Klarna, and Affirm will pop up and ask if you want to pay in installments. If you already have an outstanding balance following you, be wary of these payment plans, Arevalo said.

Often, Arevalo customers miss these payments or do not meet them within a specified time, then incur late fees or deferred interest.

According to a survey by LendingTree, more than 40% of Americans who take out a loan now, repay later have made a late payment.

LendingTree called it a “gateway to overspending” after survey results revealed nearly 70% of users admit to spending more than they would if they had to pay for everything upfront.

“If the budget was not really able to support [the purchase] right off the bat, what you do is push things further or kick things that can go forward,” Arevalo said. “It’s just sort of adding on to your existing debt with really no plan to address it.”

Read the fine print

Debt consolidation loans are also growing in popularity. Although they may succeed, they give Mora a break.

“There are a lot of ads on social media [saying] “Oh, debt consolidation will solve your problem,” he said. “The reality is that the reason there are so many of these ads is because it’s very profitable.”

Typical interest rates on debt consolidation loans range from around 6% to 36%, according to August data from NerdWallet. To get this low rate, you will need a credit score of 720 or higher.

Mora wouldn’t completely rule out consolidation, especially if the loan rate is lower than what your credit card charges. But it comes down to habit, he says.

“What often happens is people do debt consolidation, and they take three credit cards and other debts, they consolidate into one loan, and then they walk away and they get another credit card.” , did he declare. said. “They haven’t really fixed the core problem.”

Transferring balances from one credit card to another should also be done with caution. Mora directs clients to find the Schumer box which must disclose fees, interest rates and other key financing points.

Mora said customers need to understand how the interest rate is structured. Ask questions like is there an introductory fee or a flat fee? Is it a fee or a tariff?

If you’re paying off a credit card balance using the minimum payment each month, be sure to calculate how long it will take.

“Debt is a fixed expense. This means that you are going to have to pay something. And as your fixed expenses increase, you run into the problem of less flexibility in your budget,” Mora said.

Debt counseling services like GreenPath and the Sanford Center are free resources that offer phone, online, and in-person options.

This story is part of MLive’s Wallet Watch series focusing on current economic issues. Do you have a wallet watch suggestion? Email us at [email protected]

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