Financial experts sound the alarm on consumer debt after pandemic
Millions of Americans can be proud of keeping their finances in check throughout the uncertain economic climate of the past year and a half.
Many people have improved their credit scores, reduced their debt, increased their savings, and achieved other milestones of financial progress.
But millions more weren’t so lucky.
And as stimulus payments are a thing of the past and other unusual financial stabilization programs unfold, alerts are being issued once again, with experts warning of rising consumer debt.
Deborah Wang knows the feeling.
The single mom had been struggling with debt for a decade, first with a mortgage on a house she kept and later with growing credit card balances, medical bills and a car loan.
“It was one thing after another,” said Wang, a 53-year-old hospice nurse who lives in the Anthem suburb of Phoenix. Despite a good salary, she continued to accumulate sales.
“” I was not using credit wisely, “she said.” I was using credit cards to make ends meet.
In 2018, when she sought help, Wang had over $ 60,000 in non-housing debt, mostly on credit cards and medical bills, as well as a car loan.
Wang said she earns around $ 500 in monthly credit card payments while accumulating $ 450 per month in interest charges.
“I was not making any progress,” she said. “Interest was killing me.”
Wang asked for help and was successful in consolidating his credit card debt and lowering interest rates to an average of 9.9%, from over 20% previously.
She handled the medical debts herself, as they did not carry interest charges, and the automatic payments.
She worked with Money Management International, a nonprofit financial advisory agency that received a $ 500,000 grant from Arizona at the end of October to help residents of the state pay off debts and balance their budgets.
After three years, Wang said she paid off her card balances in early 2021 and decided to keep them paid.
During that time, she was able to put money in a savings account and contribute to a retirement plan at work and saw her credit score jump over 100 points.
All but one of her four children are old enough to live independently, which also helps, and she continues to drive a 2014 Nissan Altima with 225,000 miles rather than buying or leasing a new vehicle.
“For the first time in my life, I have an emergency fund,” she said. “I also have other financial goals and I can actually see them. “
Nationally, debt problems have not reached acute levels and, in some ways, have improved dramatically.
But the end of various support programs could turn recent tailwinds into headwinds.
Here are some areas to watch for in the coming months.
Credit cards under control, for now
Credit cards are a potential source of concern, but Americans are managing their payments right now.
In fact, defaults on cards issued by banks fell to an all-time high in the second quarter, reported the American Bankers Association, which has been tracking this information since 1993. Figures for the third quarter are not yet available.
Still, card use is starting to rise, with Americans owing balances of $ 787 billion in the second quarter, up from $ 770 billion in the first, reported the Federal Reserve Bank of New York.
This was the first increase after four consecutive quarterly declines.
Considering the double-digit interest rates that most cards carry, consumers can’t afford to get complacent.
Student loan repayment shock is approaching
Student loan balances edged down in the second quarter, but could be a bigger problem than credit cards.
Most borrowers were automatically enrolled in 18-month forbearance programs that began to end in September, said Kate Bulger, senior director of business development for Money Management International, the non-profit group.
About one in four working adults has these debts, for which the average monthly payment is about $ 400.
Because student loan payments are quite large and because most borrowers haven’t had to worry about making them in a year and a half, resuming payments could come as a shock to many people, Bulger said. . “This is the (category of debt) that worries me the most,” she said.
Possible debilitating medical debts
Money Management International and others have warned against medical debts, in part because many people with COVID-19 racked up tens of thousands of dollars in bills to treat the disease and could have missed thousands of dollars. of lost wages.
Before doing anything, people facing high medical bills should make sure the charges are correct, the agency suggests. Check that the services provided have been listed correctly, along with the fees, dates and physicians involved. If incorrect charges are discovered, request that they be removed.
If you anticipate payment problems, try contacting medical providers to inquire about financial aid. You might be able to get free or discounted care if you’ve been treated at a nonprofit hospital, or you might be able to negotiate a long-term payment plan, suggests Money Management International.
Do not charge the balance to a credit card, as this will likely start to earn interest.
Uneven recovery ahead
As with national income and wealth trends, the economic recovery has been uneven.
People who have kept their jobs and watched their homes and stock portfolios rise in value have fared well, while many others have struggled.
In fact, consumer bankruptcies – a key indicator – remain a bright spot so far, with the number of deposits down 25% in the first 10 months of this year compared to the same period in 2020, according to the American Bankruptcy Institute and researcher Epiq. .
But bankruptcies are a lagging indicator, as people often don’t file their tax return until they’ve been struggling with debt for months or even years.
While deposits are at an all-time low, the expiration of government stabilization programs, declining lender tolerance and other challenges do not bode well, said Amy Quackenboss, executive director of the American Bankruptcy Institute.
According to Money Management International, common signs of financial stress include the accumulation of collection letters, a high or increasing number of phone calls from creditors, a person’s pronounced reluctance to discuss finances, and repeated loan requests. silver.
“We expect to see another wave of people asking for help,” said Thomas Nitzsche, spokesperson for Money Management International.
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