Record-Breaking Debt Rings in the Holidays
For many Americans, the 2023 holiday season is a cause for celebration and also stress. With record-breaking credit card debt surpassing $1 trillion for the first time, it may feel like a lot of consumers are getting lumps of coal in their stockings this year.
After all, about 25% of Americans are still paying off holiday debt from 2022, according to WalletHub’s November holiday shopping survey. In fact, in Q2 2023, credit card balances saw the most significant increase among all debt types, including auto loans, student loans, and mortgages.
When you consider that the average credit card charges around 21% interest rate on overdue payments -- nearly five percentage points higher than in 2022 – minimum payments end up becoming an endless revolving door of debt for many consumers.
So, if you find yourself struggling to climb out of credit card debt this year, you are nowhere near alone. But as much as misery may love company, it’s a safe bet misery would prefer living debt-free even more. Thankfully, there are some strategies, methods and spending tips that you can leverage to help avoid getting into more debt this holiday season.
But, first things first…
How did we get here?
Given all the challenges of the last few years, this record debt is dismaying but hardly shocking. According to the Federal Reserve Bank of New York, credit card issuance has been steady over the last few years, averaging about 92 million newly-issued cards each year between 2017 and 2019. The pandemic caused a sharp contraction in new credit card issuance, but lending returned across all credit score groups in 2021.
In fact, there are currently 70 million more credit card accounts open than in 2019. Approximately 69% of Americans now possess at least one credit card. Compound this with a declining personal savings rate and more than half of adults living paycheck to paycheck in the face of inflation, we now have a perfect credit card debt storm.
So, what do you do if you have five digits (or more) in credit card debt and need to get rid of it?
- Buy now, pay later – Buy now, pay later plans (BNPL) are a popular alternative to finance holiday purchases that are now offered by most major retailers as well as by app-based lenders. Affirm, Apple Pay Later and Klarna are among the most popular BNPL apps. But, keep in mind that while BNPL plans generally don’t charge interest, they do levy late fees — of up to $15 — which can add up.
- Debt consolidation – Debt consolidation is one method to pay down your debt faster. You might use a personal loan, balance transfer credit card or even your home equity to consolidate your existing debt and pay it down more quickly. A home equity loan (HELOC) can be a good solution for homeowners paying down high-interest debt since you can use the equity you've built in your home to qualify for a lower interest rate and start eliminating your balances. Not sure if consolidation is right for you? Check out this blog to see if it makes sense given your financial situation. to see if it makes sense given your financial situation.
With debt breaking records, JG Wentworth can slash yours up to 51%.
What NOT to do…
The average 401(k) balance fell 4% in the third quarter while withdrawals and loans rose, according to a recent report by Fidelity. This is a metric for desperate times, and one most financial experts advise against for two main reasons:
- As tempting as it may be, raiding a 401(k) means you’ll be forfeiting the power of compound interest.
- If you’re younger than 59½, you could be subject to a 10 percent early-withdrawal penalty. And even if you are not dinged with the penalty, you still have to pay income taxes on the money you withdraw.
A retirement loan is slightly better than a withdrawal (in a down market in which your retirement portfolio is getting clobbered, it might make sense to use the money to get rid of higher-interest debt) but generally, you should try to avoid borrowing from your retirement account unless it’s an absolute last resort.
The DL on APR…
The only way to break the vicious cycle of credit card debt is to get a firm handle on your numbers. Knowing exactly how much you owe, what your APR is, and how long it will take to pay off are the cornerstones of achieving debt resolution.
Once you calculate your debt, it’s crucial that you know what your APR is. For those still familiarizing themselves with the ins and outs of credit card debt, APR is the interest rate or cost you pay yearly to borrow money for the purchase — and card rates are now near record highs. Among them, store or retail cards have the highest of the high interest rates, so choose wisely.
Ideally, the best way to borrow is to pay no interest at all, and you can do that if you’re able to get a 0% APR card. Of course, this only means you’ll pay no interest for a certain period of time (generally up to 21 months), so you may not have to pay interest charges on purchases made now until August 2025.
That said, pay close attention to when that 0% interest period will end, because when it does, the rate will spike up to the national average — or higher — and as rates continue to rise, that could mean you’ll pay 25% in interest charges or more.
Don’t rely on rate drops…
Given all this doom and gloom, it may be encouraging to know that Bank of America has predicted the Federal Reserve will finally ease interest rates starting in the middle of 2024, and benchmark borrowing costs will drop below 5 percent.
More specifically, according to the CME FedWatch tool, the rates could fall between 4.25 and 4.5 percent. While those reductions will cause the cost of credit card debt to drop slightly, a senior industry analyst at Bankrate warns Americans shouldn't rely on those rate drops to bring their debts under control.
- Someone with $6,088 in credit card debt (the national average, according to TransUnion) who only makes minimum payments at 20.72 percent would be in debt for 214 months and would owe $9,063 in interest.
- If the average rate falls to 19.72 percent, the new payback terms work out to 212 months and $8,592 in interest (again, assuming minimum payments toward $6,088 in debt).
While these projections offer a slight improvement, they don’t really provide a clear exit for those struggling with credit card debt.
Navigating your options…
So, what are your options to avoiding more debt during this tumultuous holiday season? At the risk of stating the obvious, the best way to break the credit card debt cycle is to make a budget – and stick to it. Doing so will help you calibrate your spending habits and prioritize your expenses. That said, there are some alternative strategies you can employ to get back on track…
Stay merry!
Dealing with credit card debt can put a damper on any holiday, but it’s more important than ever to be grateful for all the things that enrich our lives: family, friends, and health. Remember that you’re far from alone with your debt, and lean into the fact that there are strategies at your disposal to make sure you’re in much better financial shape next year. In the meantime, here are some tips and tricks to save money during the holiday season that might help alleviate your immediate credit woes for the time being.
And if you’re finally ready to make debt resolution your New Year’s resolution, we’ve got you covered… *
* Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
JG Wentworth does not pay or assume any debts or provide legal, financial, tax advice, or credit repair services. You should consult with independent professionals for such advice or services. Please consult with a bankruptcy attorney for information on bankruptcy.
Sources Cited
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Singletary, M. “Should you use retirement money to pay off credit card debt?” Washington Post. August 3, 2022.
Amond, R. “A bad deal gets worse — interest rates on retail credit cards hit a record high, here’s what to consider instead.” CNBC. December 2, 2023.
Sheffey, A. “Interest rate cuts are coming next year, Bank of America says.” Business Insider. Nov 27, 2023
Desai, N.G.. “Interest rate cuts are coming next year, Bank of America says, as bank predicts 2024 will be 'year of the landing' for the economy - what does it mean for you?” Daily Mail. November 27, 2023.
Knueven, L. “The average credit card balance is more than $6,000 — here’s how to pay yours off.” CNBC. November 10, 2023.
Veling, J. “7 Buy Now, Pay Later Apps in 2023.” Nerd Wallet. October 23, 2023.
Kumok, Z. “What to know about personal loans.” CBS. October 3, 2022.
Maxwell, T. “What is a HELOC?” CBS. February 23, 2023.