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Even a mild recession could cause a lot of pain for credit card debtors.
That’s because credit card rates are so much higher now than in the past. The current national average is 17.61%, just shy of the record set in July. By comparison, the average credit card charged about 13% when the Great Recession began.
I’m not saying the next recession will be nearly as bad as the Great Recession, but it doesn’t have to be in order for credit card delinquencies to become a significant problem. Even now, amid a record 10-year economic expansion, delinquencies are ticking up. The Consumer Financial Protection Bureau reports that in 2018, about 9% of general purpose credit cardholders and 4.5% of private label cardholders had at least one severe delinquency in the preceding 12 months.
For private label cards (often referred to as retail or store cards), that’s the highest severe delinquency rate since 2011, according to Equifax.
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While most people are doing well these days, there are significant pockets of instability. Many people are already living close to the edge, and a recession plus very high credit card rates would be a nasty one-two punch. Many more people might be unable to pay their bills.
Just 35% of Americans have enough savings to cover three months’ expenses, and 28% have no emergency savings at all. Additionally, 39 million U.S. adults have been carrying credit card debt for at least two years, and another 8 million can’t recall how long they’ve been in debt. A quarter of debtors expect to die in debt. All of this despite an extraordinarily low unemployment rate of 3.7%. I fear what could happen to credit card debtors if that rises to 5%, 6% or 7%, let alone the 10% we saw in 2009.
Credit card rates have fallen slightly since the Federal Reserve cut rates in July, but that’s little comfort to credit card debtors. A quarter-point decrease from the record-high of 17.8% only saves someone making minimum payments toward the average debt $1 per month. The Fed pegs that average debt at $5,700, which means those minimum payments would stretch nearly 20 years and cost about $7,500 in interest (more than double the principal).
What you can do about it
My top tip is to get a 0% balance transfer card, which lets you transfer your existing high-rate credit card debt to a new card with no interest for up to 21 months. Watch out for transfer fees – most balance transfer cards charge them, typically 3% to 5% of the amount being transferred. Three cards offer 15 months with no interest and no transfer fees as long as you make the transfer within 60 days of opening the account. Those are the Chase Slate, Amex Everyday and BankAmericard.
Depending on how much you owe, a balance transfer could save you hundreds, maybe even thousands of dollars. The minimum payment math is brutal. Even if you commit to a much quicker payback cycle — let’s say 21 months — that would cost you $965 in interest if you have the average debt ($5,700) at the average rate (17.61%). Make your personal credit card rate 0%, either by paying your bills in full or by taking advantage of a balance transfer.
You could also consider a personal loan. Rates aren’t zero, but they are as low as the mid-single digits if you have good credit. Personal loans are a useful way to consolidate debt and lower your interest rate. The application process is quick and easy, and the debt is unsecured, so while you should pay it back, you’re not putting your house or car on the line. The typical term is three to five years.
In addition, look for ways to earn more and spend less. While the business cycle appears to be slowing, jobs are still abundant and taking on a second job isn’t something you need to do forever. Nearly half of U.S. workers have a side hustle and they bring in more than $1,100 per month on average. Extra earnings can turbocharge your debt payoff process.
The flip side of earning more is spending less. To that point, let’s remember Benjamin Franklin’s famous saying, “A penny saved is a penny earned.” Consider dropping extras that you’re not taking full advantage of. Premium cable channels, gym memberships and other subscriptions are good places to start, because when you cut a recurring monthly expense, that has 12 times the annual impact of doing a similar thing one time.
Finally, consider nonprofit credit counseling, especially if you owe a considerable amount on your cards (say, $5,000 or more). I recommend Money Management International and other members of the National Foundation for Credit Counseling. In exchange for minimal fees, these organizations consolidate your debt, negotiate lower rates and put you on a path to financial freedom.
Don’t listen to depressing stats, such as that 25% of debtors expect to die in debt. Follow the steps detailed here and get started. You can do it. Lots of people already have and you can, too.
— By Ted Rossman, industry analyst at CreditCards.com
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.