Rebecca Moore really enjoyed her vacation this year and wanted to do her best for her friends and family.
“For me, that meant spending money on quality, thoughtful gifts,” said the 32-year-old digital marketer in New York City.
“The problem is that the ‘high-quality, thoughtful gift’ I ended up buying went over my budget and did the unthinkable,” she said. “I put everything on my credit card.
What difference will a few years make? Many consumers are now turning to credit cards for vacation spending, having run out of excess cash due to ongoing inflationary pressures, even after the pandemic provided additional savings.
“While wage growth averages about 5%, inflation is about 7%,” says senior industry analyst Ted Rossman. When “Consumers are inherently upside down. That’s largely why their emotions are so depressed.”
Financial analyst Richard Barrington said demand for credit fell when the pandemic hit because spending opportunities were limited. .
“During and after the lockdown, people were hesitant to travel and spend much time in public due to health concerns,” he said.
Meanwhile, the federal government sent stimulus checks to most Americans. Because of the limited amount of casual cash and the ways to spend it, the American personal savings rate (defined as the percentage of disposable (after-tax) personal income saved) hit a historic 33% in April 2020. reached. It remained elevated until late 2021. .
and now? New data from the Bureau of Economic Analysis show that the US personal savings rate has plummeted to her 2.3%. This is the lowest level in 17 years.
“People are also reluctant to lower their living standards and have not adjusted their budgets yet, so the first impulse is to borrow,” Barrington said.
The instinct to borrow under these circumstances makes perfect sense, but it’s disappointing given that rising interest rates have made borrowing rather expensive.According to the latest data from Bankrate, credit card The average rate is now 19.55%, the highest ever.
At the beginning of the year, the average credit card interest rate was 16.3%, according to Bankrate.
Rothman notes that when the average annual interest rate was 19.4%, “If you were making minimal payments on your $5,000 credit card debt, a rate hike would extend your repayment cycle by seven months and add $1,166 in interest. has been added,” he said.
At the same time, Americans are slipping further into debt. Balances were up 15% year-over-year in the third quarter. This is his largest annual increase in over 20 years.
“In terms of credit card balances, we are back to pre-pandemic levels,” said Rossman. “And those who have a balance are holding it for a longer period of time.”
In fact, according to CreditCards.com, 60% of Americans with monthly credit card debt have had this debt for at least a year. This is up from 50% last year.
Low-income households feel the greatest burden.
“Many people making less than $50,000 a year struggle to pay the bare minimum,” says Barrington.
Banks are starting to pay attention, but overall they’re less concerned, Rothman said.
“Although we do see some households struggling, especially at the subprime level, the big picture is still relatively positive. below standards,” he said. “In general, consumers are doing pretty well.”
The big wildcard: What will happen to the job market in 2023 as the Fed tries to put a lid on inflation?
“The unemployment rate will go up, but will it go to 4.5%? 5%? 6%? If there is a recession, it will be mild,” Rothman said.
For now, he said, “people who have been laid off are finding new jobs quickly, and the biggest predictor of whether someone will pay off their debt is whether they have a job.” .
Personal finance journalist Vera Gibbons is a former staff writer for SmartMoney magazine and a former correspondent for Kiplinger’s Personal Finance. Vera, who spent more than a decade as an on-air financial analyst for MSNBC, now co-hosts the weekly non-political news she founded podcast. No PoShe lives in Palm Beach, Florida.
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