Inflation means that money counts for less, while products and services cost more. This has serious ramifications for those with credit card debt. Basically, you pay more for commodities, and if you use your credit card, you also pay more in interest. For consumers who find themselves in such a tight corner, a debt settlement program is the only way out.
Fortunately, consumers can take proactive steps to manage their spending and reduce their reliance on credit cards.
What Happens to Credit Cards During Inflation?
Credit card debt rockets when inflation bites and the Federal Reserve Bank increases interest rates. This is partly because lenders raise the annual percentage rate (APR) on credit cards, increasing consumers’ financial burden.
The interest rate hikes in 2022 are a good example. The rates went up by 2.25% over several adjustments during the year. The net effect was that interest on credit cards went up by $22.50 for every $1000 in debt. In these circumstances, it’s easy to see how consumers can get stuck in a debt trap.
Debt consolidation programs are one way to get out of the trap, but they’re by no means the only way.
5 Ways to Handle Credit Card Debt During Inflation
The best way to survive the rate of inflation is to pay it off as quickly as possible. This is easier said than done for many families that live month to month. Lenders aren’t insensitive to consumers’ plight, however, and many will revise their card interest rates if you talk to them about it.
According to analysts, 70% of credit card users who spoke to their lenders about revising their interest rates were successful. The average reduction was seven percentage points which makes a big difference.
1) Debt Consolidation
If you have more than one credit card, consolidating the accumulative debt in one place is a good idea. Your options include a balance-transfer credit card which could have zero percent interest. However, the zero percent is for a limited time, usually 12 – 24 months. Try to settle as much of the debt as possible to avoid the impending interest.
You could also consolidate your credit card debt with a personal loan. Personal loans have lower interest rates than credit cards, which makes monthly installments more manageable and can even make it possible to occasionally overpay with the extra cash.
2) Credit Counseling
Some lenders have credit counselors to help you manage your debt and make smarter financial decisions in the future. Non-profit credit counseling agencies help you create a budget that helps you settle existing debt and avoid future debt.
An option is to direct automated payments into your lines of credit, including student loans and mortgages, and savings, while still leaving you with some “silly” money.
3) Pick Your Payment Approach
There are two approaches to choose from: debt avalanche and debt snowball.
A debt avalanche is when you pay off the debt starting with the highest interest rate while maintaining minimum payments on your other debts. When that’s done, you move on to the next highest, and so on.
The debt snowball method is when you pay off the lowest debt first and then add the “extra” disposable income to the payments for the next debt. The money available to pay debts increases, enabling you to settle accounts quickly.
4) Cut Your Spending
The most obvious solution that is probably the most difficult to implement, especially if your non-negotiable expenses are high like tuition fees for three children, school sports, mortgage payments, payments for two cars, car and home insurance, monthly medical prescriptions, and the list goes on.
Still, there are opportunities to shave off a few dollars here and there. You can shop around for new insurance providers with more favorable premiums. Do all your major shopping once a month to capitalize on bulk discounts and reduce impulse buying. Find a route to work that lowers fuel consumption.
5) Automate Automate Automate
Automate as many functions as you can, including payment dates and expense tracking. There are plenty of apps that help you keep track of your spending and keep you on track to meet your financial goals.
How Do Interest Rates Affect Credit Card Debt?
Interest rates have a direct impact on credit card debt. The higher the interest rate, the higher the credit card interest, and the greater the debt. The Federal Reserve Bank has hiked interest several times over the past year or two, and now stands at around 16%. It’s expected to reach 17% over the course of 2023.
Lenders absorb the increases by adding another interest amount to the Fed’s adjusted rate.
For example, following a bump in the interest rate, lenders raise their interest by 6.99% for those with exemplary credit history and by 12.99% for those whose credit score is fair.
Consumers have an average credit card balance amounting to $5525. If you’ve only been paying the minimum amount, it’ll take roughly 16 years to pay off the balance, and you’ll have paid a whopping $6000 in interest.
How Does High Inflation Affect Creditors?
High inflation doesn’t just impact consumers. Lenders or creditors also take a knock. This is due to two main reasons.
Inflation decreases the value of money. For example, you need more money to pay for the same product you bought a month ago. This means that money lent two months ago was worth more than the money they currently receive. They paid more out than they’re getting it in.
Inflation increases the number of defaulters. The cost of daily living goes up, which makes it difficult for consumers to pay off their debt. Feeding and clothing children trump loan payments. They may default on their current balances, which results in a significant loss for creditors.
Alleviate Financial Solutions Is A Lifeline For Those Drowning In Debt
Alleviate Financial Solutions provides credit card debt relief to people who are overwhelmed by the extent of their debt. We can help you pay your debt faster, manage your debt, and learn positive financial habits to avoid future debt and dependence on expensive short-term loans.
If you are ready to get out from under your debt burden, contact us via our onsite contact form or call (877) 879-4905 now.