Inflation, Rate Hike Impact on Consumer Debt Level

We speak with Matt Schulz, Chief Credit Analyst at LendingTree, about the debt level in the U.S. and how high inflation and rate hikes are impacting consumers’ money. Schulz also talks about how consumers may want to think about investing during this time, as well as buy now, pay later (BNPL) services.

What does the current debt level look like in the U.S. and how has it changed during the pandemic?

Debt is rising across the country, and it’s not likely to stop anytime soon. A recent report from the Federal Reserve Bank of New York shows that Americans have $15.84 trillion in household debt. That’s $1.7 trillion more than we had at the end of 2019, before the onset of the pandemic, and there’s no reason to think that growth is going to stop anytime soon. If anything, it could accelerate.

Where do you see the largest chunk of the debt-load increase/decrease in the last few years or over the last year? Was there an area that surprisingly saw little increase?

We’ve seen a major resurgence in credit card debt in the past year. That follows a massive decrease in balances in the beginning of the pandemic. To their credit, taking advantage of government stimulus and reduced spending, Americans did an excellent job of paying down credit card debt throughout 2020 and into 2021. Card debt shrunk from a record $927 billion in Q4 of 2019 to $770 billion in Q1 of 2021. Now, however, that debt is back up to $841 billion and is likely to climb.

Auto loan debt has grown in a big way, too, up from $1.33 trillion at the end of 2019 to $1.47 trillion in Q1 of this year. Anyone who has looked at the price of cars in recent months likely won’t be too surprised by that. Mortgage debt has spiked as well, jumping from $9.56 trillion at the end of 2019 to $11.18 trillion in Q1 2022.

What hasn’t moved much? Student loan debt, which was at $1.58 trillion in Q1 2021 and is now just a tick higher at $1.59 trillion.

How is the consumer debt level impacted by high inflation and rate hikes?

Inflation impacts virtually everything. When things are getting more expensive by the day, people’s financial margin for error shrinks, and it was already tiny to begin with. Yes, plenty of people had extra cash on hand for much of the pandemic, thanks to government stimulus and overall reduced spending, but for many folks, that cushion had already shrunk in a big way. Inflation only served to speed that even more. That leaves more people more reliant on credit cards and more likely to fall back into debt.

Combined with inflation, the Fed’s rate hikes are a major double whammy against consumers. Higher prices mean that budgets don’t stretch as far as they used to. Higher interest rates mean that going into debt is more costly than it used to be. Put the two together, and it puts consumers in a really tough spot.

Then, when you consider that the Fed is nowhere near done with raising rates, things look even more troubling. Add it all up and it means that it is more important than ever to try and knock down that credit card debt as soon as you can. It’s only going to get more expensive if you don’t.

How can consumers get ahead of their debt in this environment?

By taking action, even if it is small. The good news is that there are plenty of options. If you have good credit, a 0% balance transfer credit card can be a godsend. These cards can give you anywhere from 12 to 21 months interest free on transferred balances, and that can lead to huge savings.

If you can’t get a 0% balance transfer card, a low-interest personal loan can be useful, too. You won’t find 0% offers with these, but you may find rates that are better than what you’re paying on your current credit card. One other option that many people don’t know about is simply calling your card issuer and asking for a lower rate. 70% of people who asked for a lower rate in the past year got one – with average reductions of 7 percentage points, which is really huge – but hardly anyone asks.

Having good credit and a good track record with the card certainly helps, but the success rate is so high that it clearly isn’t just folks with perfect credit who are getting their way.

How should they think about investing during this time?

It depends on your individual circumstances. If you’re young and in the market for the long haul, then you should just sit tight, avoid looking at your 401(k) balance and stay in the market. It can be difficult to do, but it is important. If you pull your money out of the market when it dips, you risk missing the growth that comes once the market turns around. Doing that simply compounds your losses.

If you’re older, the calculus can be quite a bit different. You may not have the luxury of waiting for the next upturn like Gen Z and millennials can. In those cases, it can be a good idea to consult a financial professional to get their advice on your next steps. It bears repeating for younger investors: Time gives you an incredibly powerful advantage over older investors, and it is one that risk squandering if you pull your money out of the market when times get tough.

Buy now, pay later (BNPL) has risen in popularity recently – what are your thoughts on this fairly new tool?

BNPL can be an amazing tool, used wisely. The popular pay-in-four model is typically interest-free, easy to get and relatively simple to understand. You know how much you must pay and for how long. That clarity gives it a big advantage over credit cards.

The danger with these loans is that they make it easy to overspend. The fact that they’re typically easier to get than credit cards can be a wonderful thing. It can be a real help to folks with little to no credit who may not have other options, but it can also be a double-edged sword. Because they’re easy to get, it can be easy to pile up several BNPL loans simultaneously or in a fairly small window. That can make it difficult to manage, especially for folks who don’t have much experience with handling credit.

Is there something most consumers miss or misunderstand about debt?

I think people with debt often focus so much on paying down that debt, getting that number to 0, that they can take their eyes off the ball.

For example, I’m often asked whether someone should save while they’re paying down debt. The answer is absolutely yes, if you can afford to. If you have no savings when you’re done paying off your credit card debt, the next unexpected expense you face is just going to have to go right back onto your credit card. That puts you right back into debt.

The best way to break that cycle is to save a little bit of money at the same time you’re paying down your debt. Yes, it means it will take a little longer to pay your debt off in full. Yes, it means you’ll pay a little bit extra in interest. However, it also means that you might be able to pay for that next car repair or vet bill without using your credit card, and that’s a big deal.

What are some of the major news headlines you are following?

I’ve spent most of my life in Central and South Texas, and I’m a parent, so the shooting in Uvalde, Texas, really has hit home for me. It is simply every parent’s worst nightmare, and my heart breaks for the families of all of those who were lost so senselessly.

When it comes financial headlines, I’m watching the Federal Reserve, the BNPL space and the state of the American consumer as a whole. I am particularly interested in watching consumer late payment data. Delinquencies have been at historic lows for years, but they’re starting to climb, and I expect they’ll continue to do so in coming months and years.

All of that said, I think it is also important for folks to step away from the news from time to time. These are intense, highly emotional times we live in. It can be easy to get sucked into constantly doom-scrolling and watching the latest news headlines. However, it is vitally important that people regularly step away and decompress. Maybe that means exercising, reading a book, listening to music, meditating, playing games with your kids or going on a date night with your spouse. Whatever healthy activity helps you escape the sometimes insanity of 2022 is something you should do more of. Your body, mind and heart will thank you.

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.