Americans opened new credit cards in response to rising oil prices and inflation caused by the Russian invasion of Ukraine in February.
According to new data from Equifax, banks issued 18.6 million new credit cards in the first three months of 2022, a 28% increase from the same period last year.
A continuing trend has intensified. Since the distribution of COVID-19 stimulus payments, lenders have been scrambling for the business of borrowers with excess post-pandemic cash. The problem is that Americans are quickly depleting their savings, and the promise of shiny new lines of credit may encourage more people to borrow money as they squander their savings.
Americans opened 73.5 million new credit cards in total in 2021. If people continue to open new cards at the current rate, we’ll surpass last year’s total by about 1 million, according to a small calculation.
There are a lot more lines of credit open with all these new cards. The total credit limit for the country increased by $91.2 billion thanks to all these new cards, or almost 60% year over year. Compared to March of the previous year, the average credit limit for new bank cards opened in March was $5,049, an increase of almost 30%.
Plus, subprime borrowers — defined as those with VantageScore credit scores below 620 — will get a bigger slice of that pie. Banks are increasingly willing to lend to subprime borrowers, even though they represent a very small percentage of the market in absolute dollar terms and generally have significantly lower credit limits than those with better credit ratings. credit.
According to Equifax, the sum of all subprime credit limits increased nearly 43% in the first quarter of 2022 compared to the same period in 2017. And others are already using that credit.
Revolving credit, which is sometimes used synonymously with a credit card since it refers to a contract of borrowing with no fixed term, grew at an annualized rate of about 20% in April, according to Federal Reserve data. . It also implies that as the prices of a wide range of basic necessities continue to rise, so will people’s demand for borrowing.
According to experts, credit indicators are not yet flashing red flags. Overall credit utilization at the end of March hovered around 20%, which is well within the 30% range that credit experts use as a general guideline when advising borrowers on how much to their available credit that they should withdraw at some point.
The looming concern is that greater limits could ultimately lead consumers to take on more debt in order to keep up with inflation, which will cost more and more to serve as the Fed raises interest rates. interest in an effort to fight inflation.
If you’re considering getting a new credit card, look for one that offers a 0% interest starting period, as long as you’re sure you can pay off the total accumulated during that period before the interest rate expires. ‘interest. If you expect to have a balance, get a credit card with the lowest interest rate you can find.
Here are three strategies for dealing with inflation, rate hikes and credit problems.
According to a recent poll, about three in five Americans acknowledge that they are living paycheck to paycheck as they struggle to make ends meet and pay for the growing expenses of food, gas and nearly every item. everything else. Additionally, more than 25% say they have spent more money than in the previous six months.
Some people may use credit cards as a method of payment. However, the survey indicated that many people who live paycheck to paycheck have struggled to make regular payments on cards that are larger than average.
So how do you manage your credit and credit cards more effectively in a difficult financial situation? Here are three tips to get you started.
- Lower your credit card interest rate.
The Federal Reserve raises interest rates to help reduce demand in an effort to control inflation. But as a result, borrowing costs on everything from credit cards to auto loans are dramatically higher. According to Lending Tree, the typical annual percentage rate for a new credit card is currently over 20%.
By switching to a 0% interest balance transfer card or transferring your existing balances on high interest credit cards to a 0% interest card, at least temporarily, you can try to pay little or no interest on your cards. Many of these credit cards offer 0% introductory rates for 12-15 months; some of these rates may be valid for two years.
- To control balances, use automatic payment and alerts.
According to a VantageScore survey, the average credit card amount in May 2022 was $5,219, an increase of about $500 from the previous year. According to the analysis, delinquencies on credit cards, or late payments of 30 to 90 days, have been increasing since the spring of 2021, along with account balances.
According to Credit Karma CEO Kenneth Lin, consumer delinquencies are on the rise again. They have practically increased since the trough of the pandemic, which is alarming.
Set up automatic payments so that at least the minimum amount required (or better yet, a little extra money) is deducted from your bank account and sent directly to the card issuer each month to ensure that you pay your credit card bills on time.
Then mark the days the money will be withdrawn and the payment due date by setting reminders and calendar alerts on your phone, laptop or physical calendar. Check again on both dates to ensure that the transaction and payment have been completed.
Avoid late fees as they can cost you up to $30 for the first offense and $41 for subsequent ones. To avoid interest charges, try to pay the balance in full each month if possible.
- Avoid using personal loans or the “buy now, pay later” strategy.
Some customers may decide to use a personal loan to consolidate their credit card debt. Depending on your credit score, the interest rate on a personal loan may be cheaper than your current credit card. In general, the lower the rate, the higher your score. Personal loan interest rates currently range from 3% to 36%, according to Bankrate.
Personal loan rates, on the other hand, are variable and will rise if the Fed raises interest rates. Your credit history can benefit from regular, on-time payments on your personal loan.
However, some credit experts are concerned that after consumers switch their balance to a personal loan, some may start racking up credit card debt again. You might want to have someone hide the cards for those of you who might be tempted to do so.
Meanwhile, research from Experian found that four out of five consumers said they use BNPL to avoid credit card debt as buy-now-pay-later products grow in popularity. With BNPL, it can be attractive to be able to purchase products with what are essentially short-term loans, pay a deposit, and then pay in three further installments over a six-week period.
But generally, BNPL products do not submit your payment information to the major credit bureaus (Equifax, Experian, and TransUnion). However, they can notify them if you skip a payment and are behind on your payments. Therefore, having a good payment history won’t help your credit, and bad information can show up on your credit report and lower your credit score.
Edited by Prakriti Arora