Americans are earning more, but rising costs and high interest rates have outweighed the benefits of higher pay, according to a recent study by Achieve.
Despite having higher income, consumers who are grappling with significant levels of debt are currently in a worse financial situation compared to those who faced similar challenges during the pandemic, as per the study.
In the first nine months of 2023, the average monthly participation in debt resolution programs increased by 119% compared to 2020, even though the average earnings rose by approximately 37% during the same period. In 2023, the typical household income of individuals enrolled in debt resolution programs was $59,900, which is a notable increase from $43,598 three years prior.
Higher earners enrolling in debt resolution programs this year also had a higher ratio of outstanding debt to total available credit on credit cards. The credit card utilization rate of debt resolution members was 76% in 2023, compared to 69% in 2020. They also have a lower median credit score of 581, compared to a median score of 601 in 2020.
"Government stimulus provided an essential financial lifeline to consumers struggling during the pandemic, but that support has been winding down at the same time that consumers are dealing with a historic surge in inflation and a challenging interest rate environment," Achieve Cofounder and Co-CEO Andrew Housser said. "That's contributed to the surge in consumer demand for help addressing debt. With the recent end of federal student loan forbearance, this trend is unlikely to subside anytime soon."
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Consumers are now running into financial trouble earlier in life, the Achieve survey said. The typical age of debt resolution members has decreased since the pandemic, with a median age of 44 in 2023, compared to 52 in 2020. Millennials saw the most significant shift, with 39% of those enrolling in debt resolution programs coming from this age group in 2023 compared to 25% in 2020.
Americans, in general, are dealing with growing debt. Credit card balances spiked by $154 billion year-over-year, notching the most significant increase since 1999, according to a recent report on household debt from the Federal Reserve Bank of New York. In total, debts increased by $786 billion from last year, with auto loan debts growing by $71 billion, maintaining an upward trend since 2011 and reaching a total of $1.6 trillion.
Also rising is the number of consumers missing payments on their debt obligations. Credit card delinquencies rose across the board for most debt types except student loans and home equity lines of credit, according to the New York Fed. The increases in credit card delinquency were the sharpest among millennials, or borrowers between the ages of 30 and 39, who are also burdened by high levels of student loan debt, according to the New York Fed.
"These repayment difficulties will likely continue to mount for student loan borrowers, now that student loan payments have resumed," the New York Fed said.
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Holiday spending is expected to reach pre-pandemic levels this year and grow between 3% and 4% over 2022 to between $957.3 billion and $966.6 billion, according to the National Retail Federation (NRF). On average, consumers plan to spend $875 on gifts, decorations, food and other key seasonal items.
Much of the spending is likely to be financed by credit cards at a time when interest rates on revolving credit have surged. Store credit cards are charging interest at a record-high rate of nearly 30%, according to a recent WalletHub study.
Consumers looking to reduce expenses this holiday might be tempted by zero percent interest financing offers some stores are making this season. Still, they should be aware that it is often a deferred interest financing agreement, the study said. This is when the retailer offers a low promotional rate, usually 0%, but can go back and apply their high regular interest rate to the original purchase amount if the balance is not paid in full within the designated introductory period. Roughly 82% of store credit cards with 0% financing feature deferred interest, but 59% of consumers fail to understand the potential pitfalls of this financing trick.
"Amid all the holiday deals, consumers really need to watch out for the double-edged sword known as deferred interest," WalletHub Editor John Kiernan said. "If you're careful, it could help you finance holiday gifts interest-free. On the other hand, it could make your holiday shopping up to 27.5 times more expensive than you're planning for."
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