Faced with 40-year highs in inflation, American consumers are turning to credit cards at an accelerating rate.
According to the credit bureau Equifax, consumers opened 28.4% more credit cards in the first quarter of 2022 compared to the same period a year earlier. What’s more, the Federal Reserve Bank of New York found that credit card balances increased by 13% between the second quarter of 2021 and the same period in 2022, the largest year-over-year increase in more than 20 years.
If you’ve noticed that your expenses have increased with rising prices and you’re worried about getting into credit card debt, here’s what you need to know. There’s good news, too: if you use your credit card responsibly, the right card can help mitigate the impact of inflation.
How Credit Card Debt Can Exacerbate Inflation Problems
Credit cards can provide valuable benefits to their users, and if you’re in financial difficulty, they can help support you until you’re back on your feet.
But it’s easy for things to get out of control with credit card debt, especially if you’re already struggling with higher costs across the board. “The increased use of credit cards probably means that people are feeling the pinch of higher prices and are using credit cards as a way to make ends meet,” says Thomas Tunstall, senior research director at the University of Texas at the San Antonio Institute of Economic Studies. Development.
And if you’re not careful, it can make your situation worse. Here are some of the ways credit card debt can harm your financial health:
- High interest rates. Credit cards carry relatively high interest rates, with an average of 16.65%, according to the Federal Reserve. In addition, credit card interest rates are usually variable, which poses an additional danger. “Rising costs are usually associated with higher interest rates as the Fed raises its benchmark,” Tunstall says. “This means that interest rates for credit card debt are likely to rise, increasing the cost of any unpaid debt.”
- Minimum monthly payments. Because credit cards have minimum monthly payments with no structured repayment plan, your balance can swell quickly if you pay the lowest amount required each month.
- No more grace period. Credit cards generally offer a grace period between your statement date and the due date each month. During this time, you can pay off your balance in full and avoid interest charges. However, if you carry a balance from one month to the next, you lose your grace period, which means that interest begins to accrue on the date of the transaction.
- Impact on your credit score. As your credit card balance increases, your credit utilization rate, which is one of the most influential factors in determining your FICO credit score. Higher utilization rates correlate with lower credit scores.
How to Leverage Your Credit Cards to Fight Inflation
If you don’t rely heavily on credit cards to fight inflation, you may be able to use your cards to fight higher prices instead.
- Tap your cashback. Many credit cards offer cash back on your purchases, which you can use to help pay off your balance. In fact, most cash back credit cards allow you to request statement credits directly to your account.
- Bonus rewards can help. Some credit cards offer higher rewards rates on certain purchases. Shop around for rewards credit cards that offer accelerated rewards rates on everyday spending categories, such as groceries, gas, streaming subscriptions, or restaurants. Just make sure you don’t spend money you can’t afford to pay back just to earn rewards – the card’s interest rate will always exceed the rewards rate.
- Open a new card with a low introductory rate. If you have credit card debt or need to make a large purchase soon, you might consider a card that offers an introductory annual percentage rate of 0%. Depending on the card, you may be able to get 0% APR on purchases, balance transfers, or both, with promotional periods ranging from 12 to 21 months. While these cards won’t reduce the burden of your debt, they can make it easier for you by paying it off without interest.
Jay Zigmont, Certified Financial Planner and Founder of Childfree Wealth, stresses the importance of understanding the terms of any 0% APR card, including the transfer fee it charges, which is typically 3% to 5% of the balance that you transfer. . “Only use a 0% card if you’re 100% sure you can pay it off within the time limit,” he says. “Don’t play credit card roulette with 0% APR cards because you’ll get caught.”
How to avoid taking on too much credit card debt
If your budget was already tight before the recent price spike, your options may be limited. “If you were living paycheck to paycheck and inflation hits, you either have to make tough choices or put it on a credit card,” Zigmont says.
But many consumers may have access to different ways to cut costs and limit their reliance on credit cards to get by. Potential approaches include:
- Review your budget and reduce discretionary spending, such as dining out, entertainment, and other unnecessary expenses.
- Cancellation of unused subscriptions.
- Reduce services, such as meal and grocery delivery apps, that charge extra for something you can do yourself.
- Shop around for auto insurance to make sure you get the lowest rate.
- Avoid using credit cards for every purchase to minimize debt-related expenses.
- Make multiple credit card payments each month to keep your balances and therefore your usage rate low.
- Looking for ways to reduce your expenses through coupons, deals, cash back apps and more.
Steps to Manage Credit Card Debt
If you’ve ever racked up credit card debt due to rising costs, or had credit card balances before inflation skyrocketed, there are steps you can take to improve your situation. debt:
- Stop using your credit card. If you’re trying to pay off credit card debt, using your cards for new purchases may feel like you’re barely making any progress. Consider switching to a debit card or cash for a while to focus on eliminating your debt.
- Decrease spending. If possible, reduce some of your discretionary spending so you can afford to spend more on your monthly payments.
- Search in consolidation. Consolidating your debt with a balance transfer credit card, personal loan, or another option might be worth it if you have good credit and can take advantage of lower interest rates. Carefully study each possibility of debt consolidation to determine if it’s right for you.
- Ask about credit counseling. If your credit is not in good condition and paying off your debts is unaffordable, a credit counselor may be able to help you through a debt management plan. For a modest fee, these plans allow you to pay off your debt over three to five years, often with lower payments and interest rates.
- Consider other approaches. If your situation is serious and you are already in arrears, you may consider debt settlement or even bankruptcy last resort. Note, however, that these options can significantly damage your credit score, so it is essential that you carefully consider all of your options and consult with a credit counselor or bankruptcy attorney before proceeding.
Although persistently high inflation degrades your purchasing power, the right credit card strategy can make the difference. It is essential that you take the time to research and carefully evaluate each approach to determine which is best for you, your current situation and your financial goals.