2017 closed with American households facing an $834 billion debt due to credit card spending according to the Federal Reserve Bank of New York. Interestingly, experts are expecting this number to keep increasing throughout 2018, despite the rising number of Americans already struggling to get out of debt. This is due, in part, to how much more accessible credit cards have become. As a result, consumers are no longer as concerned about staying on budget as they were before.
Analysts predict higher interest rates
To make matters worse, the Fed announced plans to increase its rates, a move that will make it more expensive for commercial banks to take out loans from Federal Reserve financial institutions. This additional cost, in turn, will most likely be passed on by the banks to their customers. This ultimately means that taking on more debt this year, be it in the form of credit card spending or bank loans, is about to become more expensive.
It is not all bad, however, as the increased interest rates may also translate to higher returns on the customer’s savings accounts. But to enjoy an even bigger return, experts suggest either signing up for a high-yield savings account or switching to an online bank. Aside from generally having higher returns than traditional financial institutions, online banks are also known to be more willing to pass on any cost savings to their customers.
Impact on American credit scores
If this trend of taking on more and more unpaid debts continues, a drop in the average American credit score will soon follow. Of course, when this happens, it will become much more challenging for people to apply for loans. There is, however, also a silver lining to all this. Even people with low credit scores should still be able to take out personal loans when necessary via peer-to-peer lending platforms. These alternative lending institutions are generally more lenient and flexible than banks and other financing companies when it comes to qualifying borrowers. In addition, they also don’t charge any fees for early payments, allowing borrowers to get out of debt as fast as possible.
Other economic implications
Credit card use is a double-edged sword. On the one hand, it helps the economy by enabling consumers to make more purchases. On the other, long-term uncontrolled credit card spending can lead to massive debt, which ultimately reduces the cardholder’s spending power. The idea is to strike the perfect balance between the two.
What can be done
Some purchases are absolutely necessary; a lot of them are not. The goal is to cut back on the latter to free up cash for the former. Credit cards should, in most cases, only be used as a last resort—or for convenience but only if the cash to pay for the charges is or is soon to become available. Of course, it’s even better to pay off any outstanding debts first before taking on more.