Overall household debt climbed to a new high of $18.04 trillion in the fourth quarter, the New York Fed reported.
Digging out of debt used to be a new year tradition.
The first three months of the year typically were the busiest for credit counselors, who were inundated with calls from Americans zapped by out-of-control holiday spending or emboldened by a “new year, new you” ethos for their finances.
But that decades-long trend may be disappearing, not because borrowers are out of their debt stranglehold but because they now need help throughout the year for their pricey car loans and ballooning card debt.
“The landscape has changed,” Bruce McClary, the spokesman for the National Foundation for Credit Counseling, told Yahoo Finance. “We are hearing more and more from people who are feeling the financial stress year-round.”
Many are stuck in what have become unaffordable car loans, while others turned to their credit cards over the past years to buffer themselves from higher prices on groceries and gas. That’s catching up to some Americans and may snare more people, with inflation still not completely under control.
Overall household debt climbed to a new high of $18.04 trillion in the fourth quarter, the Federal Reserve Bank of New York reported last week. A lot of the increase came from inflating credit card balances, which increased by almost 4% to a record $1.21 trillion.
Some of those increases in debt over time can be chalked up to population growth. Others are seasonal. What’s a little more concerning is the trajectory of serious delinquency rates, especially for auto loans and credit cards. The share of borrowers 90 days or more past due on those debts are at 14-year highs — which is not a coincidence.
“I really see a trend of automobile loan payments being very high and causing a lot of stress on how people pay for living expenses and [their] increasing reliance on credit,” said Victor Russell, operations manager for Apprisen, a nonprofit credit counseling agency.
Russell said those calling into his agency, which serves struggling Americans nationwide, span the earnings spectrum. The NY Fed report, too, noted that auto loan delinquencies specifically have been rising across credit score bands and income levels.
Credit counselors at CCCS of the Savannah Area Inc. in Georgia are struggling to figure out a solution for one older gentleman who can no longer afford his car payment and his auto insurance premium, a category that has also surged. Motor vehicle insurance prices rose 2% in January from the month before and almost 12% from a year ago, according to the latest inflation data released this week.
“He has a decent-paying job. He cut expenses all across the way, but the car was the biggest expense,” said Alexandra Nicosias-Kopp, director of operations at CCCS. “That was a really tough situation that we’re still figuring out.”
In general, a car payment should take up no more than 13%-14% of an individual’s net income, Russell said. But with the average payment for used cars at $525 and for new cars at $734, per Experian, that rule of thumb is out the window.
“We’re seeing individuals paying 21%-22% of their income toward car payments. That’s almost a quarter of your income just servicing an automobile loan payment,” Russell said. “That’s not sustainable.”
The term lengths on these loans have also increased to 78 months when they used to be 48 to 60 months long, Russell said, meaning people are stuck with unmanageable payments for more than six years. And that’s why many of his clients are turning to credit cards for their basic living expenses. But with credit card rates averaging north of 20%, that just adds to their struggles.
The strain could get worse.
For one, credit card interest rates aren’t going down anytime soon. Those rates are directly linked to the Federal Reserve’s benchmark rate, and after this week’s report showing inflation ticked back up in January, the Fed may delay any rate cuts even longer.
At the same time, there’s increased uncertainty over where consumer prices are going. Economists have warned that most of the tariffs the Trump administration plans to levy on imports will ultimately be paid for by consumers in the form of higher prices.
That outlook alone is a good reason for Americans who are even just a little worried about their finances to reach out for advice. You don’t need to wait until you’re in dire straits to get in touch with a nonprofit credit counselor.
“The longer you wait and the worse things get, the fewer options you have, and it becomes more difficult to turn things around,” McClary said. “Act now rather than wait and see how things pan out.”
Written by: Janna Herron @Yahoo Finance
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