With interest on her credit cards as high as 30%, Andrea Lyttle rarely charges anything. If she does, she pays the monthly balance in full.
Like most consumers, Lyttle feels the pinch of high interest rates at a time of high inflation. But she’s also painfully aware of the pitfalls of credit card debt. Just last year, Lyttle, 57, managed to pay off a whopping $40,000 in debt on various cards. Now she has no intention of letting the balance on her few accounts accumulate again.
“I just wasn’t good at managing debt,” said Lyttle, a project manager for a software service company who sought help from a Columbia-based credit counseling nonprofit. “For the most part, it’s kind of like it sneaks up on you.”
Consumer credit card debt has hit new highs even as interest rates have soared, compounding the problem for those who carry debt. Meanwhile, rising inflation has cut into savings and boosted prices on essentials. Consumers are feeling the impact of 10 rate hikes by the Federal Reserve over the past year and a half.
Total credit card balances remained at a record $986 billion in the first three months of the year, not falling from the last quarter of 2022 as is the typical new year pattern, according to the Federal Reserve Bank of New York’s most recent quarterly report on household debt and credit in May. The share of credit card debt that became delinquent also increased. Maryland residents carry an average bank card balance of $6,501, according to a June 20 report by Bankrate division Creditcards.com.
Interest rates on credit cards, meanwhile, averaged an all-time high of 20.77%, Creditcards.com said in a June 21 survey.
“Each time the Fed raises rates, it becomes costlier and more difficult to manage debt, especially higher interest rate credit cards,” said Bruce McClary, spokesman for the National Foundation for Credit Counseling. “It’s putting a significant squeeze on a lot of people’s budgets,” including some who just a couple of years ago had no problem paying down balances and building savings.
“They’re accumulating that debt because they simply don’t see any other option when it comes to taking care of the necessities, paying for groceries, putting gas in the car,” McClary said.
The Federal Reserve has raised interest rates to tame inflation, with the intent of slowing spending by boosting the long-term cost of borrowing. In mid-June, the U.S. central bank shifted course, leaving rates unchanged because of a stronger-than-expected economy. But the Fed indicated it may need to boost borrowing costs again this year to keep inflation in check.
The Fed only controls the federal funds rate, what banks may charge each other for overnight loans, but that rate impacts the prime rate, which is linked to rates on car loans, credit cards and mortgages.
The government is attempting to strike a balance between having consumers pay excessive prices or drown in debt, said JP Krahel, associate professor of accounting at Loyola University of Maryland’s Sellinger School of Business.
With food, rent, mortgages and other necessities costing more, consumers may need to lean more on credit cards at a time when banks are charging significantly higher interest rates, Krahel said.
“It’s easy to forget that every time you swipe your credit card, you’re taking out a loan,” Krahel said. “If you run up a bill, you may end up paying possibly double the sticker price of whatever you bought, if you wait long enough [to pay it off].”
Many households are struggling to make even timely minimum payments. A Harris Poll released in December on behalf of the credit counseling foundation showed 11% of respondents had missed at least one loan or credit card payment in the previous 12 months.
Credit counselors trace recent struggles with credit card debt to a period of high unemployment during the pandemic, followed by rising inflation.
“A lot of people got used to just charging everything,” said Christina Pawlak, a counseling manager with Consumer Credit Counseling Service of Maryland and Delaware, or CCCS MD, a nonprofit offering debt relief programs. “And when you have a maxed-out credit card with a 29% interest rate, when you do make that minimum payment, you’re really just paying off the interest.”
The number of customers seeking credit card debt management counseling has jumped 39% during this year’s first three months compared with the first quarter of 2022 at GreenPath, another nonprofit that works across the U.S. Last year, GreenPath managed more than 49,000 ongoing debt management plans, and helped more than 10,000 people pay off balances.
“Inflation continues to make budgets tight for customers. Personal savings have dwindled. Interest rates and credit card debt are at all-time highs,” said Trent Graham, program performance and quality assurance specialist for the nonprofit and a longtime counselor.
Some clients, he said, feel like “they’re in a perpetual cycle of continuing to pay their credit cards but not getting anyplace.”
CCCS MD also has seen a steady increase in clients looking for help, especially with the end of pandemic-related financial safety nets and loan forbearances. Counselors are on track to handle about 5,000 phone sessions with clients seeking help with credit or housing issues, a 50% jump over last year, CCCS MD CEO Helene Raynaud said.
“People are still struggling with housing issues as a result of the pandemic and loss of income, and with a lot of the assistance programs that were available to help with housing no longer there,” said Susan Fitz, vice president of counseling, programs and compliance for CCCS. “The reliance on debt to help fill the gap has once again been something that consumers are doing.”
CCCS’ programs help clients understand their financial situations, set goals and offer avenues to resolve poor credit, foreclosure and housing issues.
“Inflation has affected people to the point where they’re using their credit cards to cover mandatory living expenses,” Pawlak said. “They’re maxing out the credit cards, and then they get these offers from personal loan companies.” Such loans can help pay bills, but also often carry high interest rates, Pawlak said, and they don’t help the consumer get control of their debt.
Experts say debt-laden consumers can start by asking creditors to lower rates, which they’ll sometimes do if credit scores are strong. Or consumers can transfer balances to lower-rate cards, then pay off balances within promotional periods.
Others may need the more intensive help of debt management programs that review income, expenses, assets and debt, look for ways to cut expenses and negotiate with creditors to eliminate or reduce interest rates and fees.
Clients who enroll in such programs usually are required to close most, if not all, credit accounts and make single monthly payments on a consolidated balance over three to five years. Counseling components help with budgeting and rebuilding credit.
Since the pandemic, creditors in some circumstances have been willing to accept lower payments or repayment of less than full balance, Fitz said.
Pawlak said many clients can pay off all their debt, improve their credit scores and even qualify for mortgages.
Lyttle, 57, who worked with CCCS MD from her home in Newport News, Virginia, had balances across several credit cards that had reached more than $40,000.
While she managed to pay a bit more than the minimum each month, she said, “with the amount that was owed and the payments that were going out and the income at the time, I could not see a way of getting everything paid off in a reasonable amount of time.”
With the help of CCCS, she closed all accounts but one and made monthly payments on a single, consolidated balance. It took changing her habits to no longer charge her groceries or gas. But after about 3 1/2 years, she paid it all off and qualified this spring for a mortgage. She uses her remaining credit cards sparingly, when necessary for travel, car rentals or purchases such as appliances.
It takes, “being mindful, watching statements,” she said, and “if I can’t pay the whole thing off, then at least pay half of it off so that maybe over two months I’m done, and keeping myself on a much tighter budget.”
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One GreenPath client, Stephanie Henderson, had nearly reached maximum balance on multiple accounts while she was paying her kids’ college tuition.
An Aberdeen resident who works as a telecom network engineer, Henderson said she’d pay her monthly bills, often making minimum payments on nearly a dozen high-interest cards from retailers such as Macy’s and Best Buy, and find that she wasn’t getting anywhere.
“Every month, it was that same issue of figuring out what to pay more on,” she said. “It was just overwhelming.”
She was turned down for a low-rate consolidation loan before turning to GreenPath, where she enrolled in a plan to pay off about $32,000 in debt.
The nonprofit helped Henderson build an emergency fund. The program, completed about two years ago, has helped her save and budget for vacation expenses rather than charging them. Using her sole credit card is never her first option.
The experience was life-changing, she said.
“It’s an intentional shift in how you view your money and how you spend your money,” she said.