Article By: Jim Porter
Now, with stimulus checks gone and inflation raising prices on nearly everything, Americans’ credit card spending has jumped more than 20% this year. By January 2023, the amount of consumer credit card debt will jump to $1 trillion.
The average APR on all credit cards, according to the Federal Reserve, is 16.27% and the average APR for new credit card offers is 22.40%. I saw one last week at 27%.
Credit card delinquency has risen steadily over the past 12 months, and I would expect this to get much worse over the next 12 months because of the inability for consumers to afford the higher rates. Credit cards, unsecured personal loans and all these buy-now-pay-later programs can really screw up a person’s financial life and their credit score.
I worked back in the 1980s as a branch manager for Beneficial Finance Company for five years and learned some valuable lessons about how high-rate credit card and personal loan companies make money. They encourage people to pay the minimum payment every month to maximize their interest income and they love consumers who pay three or four days after the grace period because late fees create profits.
My favorite way to teach people about how to avoid the pitfalls of credit card debt is to explain the cost of financing stuff that depreciates in value.
A mother of three little boys goes to Walmart and buys $200 worth of underwear, uses her 24% Visa card and then pays the minimum payment of $6 per month. It will take four and a half years to pay off the underpants that were probably shredded in a year, and even if the boys are clean freaks, nobody passes down jockey shorts to their little brother.
Debt consolidation loans can be incredibly useful, but they can also be a recipe for disaster.
It makes tremendous sense for a homeowner to take out a $100,000 second mortgage loan or HELOC and payoff $100,000 worth of credit cards, auto loans and personal loans at a much lower APR to save $1,000 per month, but too often people don’t use the $1,000 savings for investments and building cash reserves. They often go right back to running up the debt and spending more than they make.
What people should do is use the $1,000 per month to pay down the second mortgage fast and then use a Visa card for travel points and pay off the credit card in full every month to avoid all the interest cost.
Jim Porter, NMLS No. 276412, is the branch manager of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.
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