UNITED STATES – Seriously overdue credit card debt is at the highest level in more than a decade, and people 35 and younger are having a harder time paying their bills than other age groups.
The share of credit card debt that is severely delinquent, defined as that more than 90 days past due, increased to 10.7% during the first quarter of 2024, according to the Federal Reserve Bank of New York. A year ago, only 8.2% of credit card debt was seriously delinquent.
If you are experiencing delinquencies or are at risk for them, experts recommend speaking with a nonprofit credit counselor and negotiating directly with your creditors. Here’s what you should know:
WHAT SHOULD I DO IF I AM AT RISK
Bruce McClary, senior vice president of the National Foundation for Credit Counseling, says anyone at risk of delinquency should seek help as soon as possible from a nonprofit credit counselor, some of which can be found through his organization. The consultation is free and a non-judgmental counselor can guide you toward a long-term solution.
Nonprofits can also help create debt management plans that have lower interest rates, no late fees and a single payment each month, McClary said. These plans may include maintenance fees, which vary, but the fees are offset by overall debt savings. McClary urged borrowers to be wary of scammers and for-profit debt consolidation companies, which often charge much higher fees than nonprofits. The Consumer Financial Protection Bureau has a helpful breakdown comparing the two.
Martin Lynch, president of the American Financial Counseling Association, echoed this advice.
“It’s difficult for many people to take the first step and contact a counselor,” Lynch said. She emphasized that consumers in debt should do their best to “first, relax” and then be as forthcoming as possible about their circumstances with the counselor. .
“You will talk for free to someone who will listen to you describe your situation,” he said. “You can share your concerns without being judged for falling into difficulties.”
WHAT HAPPENS WITH THE NEGOTIATION WITH CREDITORS
Both Lynch and McClary urge borrowers to contact credit card companies directly to negotiate interest rates, fees and long-term repayment plans, noting that it is in the companies’ best interest to pay before the debt kicks in. collection.
“The best thing you can do is reach out, provide an honest assessment of your ability to pay over time and ask what options are available to you both ‘on and off the menu,'” McClary said. This type of formulation can give creditors an opportunity to offer more flexibility, he said.
McClary and other experts emphasize that most credit card companies and other lenders have hardship programs available for cases like these. These options gained visibility during the COVID-19 pandemic, when more companies publicly announced that consumers facing hardship could skip or defer payments without penalties.
WHY DEFAULTS ARE INCREASE
The average annual interest rate on a new credit card is 24.71%, according to LendingTree, the highest since the company started tracking it in 2019. That’s partly because the Federal Reserve has raised its interest rate. key interest rate to a 23-year high to combat the highest inflation in four decades, which peaked at 9.1% in June 2022.
At the same time, pandemic-era aid such as stimulus payments, the child tax credit, increased unemployment benefits and a moratorium on student loan payments have ended. Not all wage increases have kept pace with inflation, hitting low-income consumers hardest, and rent increases have eaten into savings some consumers may have accumulated during the early years of the pandemic.
Silvio Tavares, CEO of VantageScore, a credit score modeling and analysis company, said delinquencies have now surpassed their pre-pandemic levels and that renters are especially vulnerable to being left behind.
“Younger, less wealthy people are experiencing challenges,” he said. “And high interest rates are having an effect.”
Tavares said the most important thing a borrower can do is know their credit score and stay current on payments to avoid paying additional interest on revolving balances and debt. He warned consumers not to overdo it with “buy now, pay later” loans, which are increasingly available “at every checkout.”
HOW WORRYING IS THE INCREASE IN DEFAULTS
Credit cards only account for about 6.5% of consumer debt, according to a report from Bank of America Global Research, but rising delinquencies appear to be outpacing income growth.
According to McClary, there is also likely a large group of consumers who are paying minimum balances and staying out of delinquency for now, but who are too financially stressed to pay their balances in full. A worsening economy could push those consumers into serious defaults, she said.
In addition to rising credit card delinquencies, retail spending stagnated in April. Walmart has said its customers are spending more on necessities and less on discretionary goods. Starbucks lowered its sales expectations and McDonald’s is offering more deals as people cut back on spending.
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