Credit & Debt

Currently, people in the U.S. are using their credit cards more than ever. While that can be a good thing if used correctly, this is bad news. New red flags are jumping in the credit card industry. The off-charge rate is growing and it’s higher than it’s been in seven years. This means people aren’t paying off the credit they’re borrowing.

The off-charge rate is the debt that loan companies don’t believe they’ll ever get back. It sits on their credit report, unpaid, and often falls off. The amount of debt that is considered charge-off rate grew another 3.82%. This is the highest number since 2012 when the economy was really taking a hit. This is due to data pulled together by Bloomberg Intelligence.

It’s not just the charge-off rate that’s growing. The number of loans considered 30-days past due also grew. This increase was seen across all seven of the largest credit card issuers in the U.S. That means the potential for the charge-off rate to grow is very high. There’s one major reason why this is happening.

The Great Recession and Credit Card Debt

A decade ago, we saw the economy collapse into what’s called The Great Recession. Good, reliable work became scarce. People were losing their homes in large number. In order to survive, credit cards became America’s saving grace. Just whip out the plastic and worry about it later! Yet, the economic crisis pushed on for many more years.

Only now is the economy starting to come back. So, what happened with the credit card debt we accumulated? Well, it stayed on our credit. We saw a degradation of our credit quality in ways we’ve never seen before. Considered ‘negative credit events’, people just held on. They declared bankruptcy. Their credit suffered, but they made it through.

Lessons Not Learned

We’re now entering a time when the economy is mostly recovered. Unemployment is down to historic lows. Wages are rising and the stock market is booming to record highs. So, why is the charge-off rate growing again? The answer is, we didn’t learn our lesson from The Great Recession. In fact, it taught us a bad lesson.

All the bad credit people accumulated during tough times is starting to fall off their credit reports. Usually a bad report will fall off in seven years. That means bankruptcies and other credit borrowed but not paid back has fallen off their reports. And, instead of doing things the right way, people are borrowing more than ever.

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Either they assumed they could afford the new credit or they know it will just fall off in seven years. It’s unknown what impact this will have on the future economy.

“Certainly, this has been one of the longest recoveries, so, in general, we have been contracting credit policy at the margin and tightening,” Discover CEO Roger Hochschild said in an interview. Hochschild said his company has been closing inactive accounts and slowing down the number and size of credit-line increases for both new and existing customers.

“If you think about lending products, there are always people who want to take your money,” Hochschild said. “You’re going for people who have many choices — they have existing cards, they could get any card they want. So, our job is to make sure those are the ones we attract to Discover.”

America is a country that runs on debt. In fact, most of us are in some type of debt or another. 80.9% of baby boomers are in debt. 79.9% of Gen Xers are in debt. 81.5% of millennials are in debt. That’s a large number of people! While most of them either have a mortgage or student loans, there’s a lot of different types. From credit cards to medical debt, we’re struggling to keep our heads above water.

When people find themselves in debt, it seems they do whatever they can to make the problem worse. They want to maintain their lifestyle, so they abuse their credit cards. They can’t maintain the status quo by saving, can they? And they know that if things get too bad, they can just declare bankruptcy.

But it’s time to admit there’s a problem. You can’t sustain a lifestyle on debt. Living above your means is not the path that leads to financial freedom. Worse yet, you could be leaving a pile of debt for your children to deal with. If you find yourself with this problem, the time is right now to take the bull by the horns.

Should People in Debt Go on Vacation?

We’re not here to tell you what to do. Rather, we want to encourage you to look at what you’re doing with your finances. If you’re in debt, you may not see it, but there are flashing DANGER warning signs all around you. No one is impressed if you saved up for your vacation this year. It’s not impressive to anyone that you’re taking your kids to Disney.

Why? Because if you’re in debt and going on vacation, you’re being financially irresponsible. Is taking the kids to Disney going to matter when you haven’t even started saving up for college? How much money do you have put away in a rainy-day fund for an emergency? Can you afford health insurance and retirement payments?

If the answer is no, you’re putting yourself and your family in danger. Taking that vacation is irresponsible and unimpressive. You don’t have the important things figured out. But don’t worry! There are a lot of other Americans who decide not to take their vacation. Instead, they understand the value of putting their money towards something more important.

Americans Forgoing their Vacation

Bankrate.com released a new poll recently that found millions of Americans won’t be going on a summer vacation this year. They cite their debt as a reason why. 44% said their monthly bills were too high. Many find that taking a vacation would end up putting them even deeper in the hole. That’s enough to take the enjoyment out of the trip.

“While a vacation is worth it, getting into debt isn’t. That just adds to the stress and takes away from the enjoyment of your vacation,” says travel expert Christopher Elliott, who writes the Navigator column for The Washington Post. While that trip to Disney or to the Grand Canyon won’t be happening, there are alternatives.

“Yes, people can stay home and have fun,” says Elliott, author of “How to Be the World’s Smartest Traveler.” “Think of all the time you’re saving by not having to go to the airport or spend hours or days sitting in a car. There’s no ‘Are we there yet?’ because you’re already there.”

Staycations Are a Thing

Every city in America has some sort of tourism board. They have activities, events, picnics, fairs, and more. Rather than spending thousands on a vacation, stay home. Maybe you avoid your chore list for a few days. Camp out near a lake for an extended weekend. Find a community pool if you don’t have one yourself.

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There’s cheap (and even free) concerts you can attend. Head to the city and hit up the museums. There are plenty of local and cheaper options to choose from. This is incredibly important if you want to stay ahead of your budget. And you still get to spend valuable time with your family. It’s just more important to get your budget in order.

Getting Your Debt Under Control

If you’re having a difficult time with your debt, there are several things you can do. The first is to get organized. You may not have a full picture of what you owe and who you owe it to. Sit down and lay it out in front of you. Write up a list of every debt, what’s owed, monthly payments, and so on. When you can see it in front of you, it helps you see what you’re up against.

If you have a lot of debts, you can try to consolidate them into a single payment. This can help save you money and lower your monthly output. Having a little extra money will help you be a better saver and put money towards worthwhile things. You can even refinance your auto loan and mortgage to get a better rate.

If you’re struggling with student loan debt, you may be eligible for a repayment plan. Repayment plans can lower your monthly payments based upon the money you make. They may even help you pay off your loan quicker than you realized you could. Again, putting a little extra money in your pockets can be a lifesaver when you need it.

Finally, learn from your mistakes! Make on-time payments to keep your credit in the green. Having good credit can help you through this process. Be proactive about your debt. Don’t just let it linger and not give it the attention it deserves. You’re not truly financially free with that black cloud hanging over your shoulder.

Photo by: Ryan McGuire

The No. 1 way to lose points on your credit score is to miss a payment.

With student debt in 2019 topping $1.52 trillion, most millenials are just one financial emergency away from tanking their credit scores.

A study conducted by credit scoring company FICO found that 63% of borrowers found no improvement to their credit score over a year, while 15% experienced a 40 point drop, a statistic that FICO VP Ethan Dornhelm called a “significant change in that short a period of time”.

The study looked at two groups of borrowers, separated into “score increasers” and “score decreasers”, and the results were intuitive to say the least. “The score increasers were consistently paying their bills and reducing their amounts owed” Dornhelm explained, “they were actively working on improving their picture.”

To understand why some borrowers’ credit score are better than others, one first needs to know what makes up a FICO score.

How does FICO calculate your score?

These are the five key factors that make up a credit score:

1. Payment history – The biggest driver of the score calculation at 35%, this looks at whether the borrower historically pays their bills as agreed, or how recent and severely they missed their payments.
2. Amount owed – Coming in at 30% of the score calculation, this looks at all the debt a borrower has and their utilization level, not just student loans but also credit cards and mortgages. Higher levels of debt and utilization ratios generally mean higher risks and lower FICO scores.
3. Credit history – This makes up 15% of the score calculation, and what this simply means is that the longer one has been managing credit on their file, the higher their score will be compared to someone who just started using credit.
4. New Credit – Contributing to 10% of the score, this looks at how often a borrower applies for credit. This can be significant for a borrower just starting out, as more frequent credit applications result in the individual being seen as a higher risk.
5. Credit Mix – The last 10% of the score is determined by how a borrower balances different kinds of credit, from loans to credit card debts.

Advice for student borrowers

Dornhelm is one of many that feel college is a meaningful investment, but emphasizes the importance for student borrowers to have a plan to pay back their loans.

“Owning an active loan is a great way to start building credit from a young age,” Dornhelm says. “On one hand it educates borrowers as to how credit works, it also allows them to plan for the future.”

In the end it’s all about striking a balance. Student borrowers can keep their FICO scores in good shape if they manage their revolving debt and keep them low, spending within their means, and paying their bills in a timely fashion.

Credit card debt has been a major problem in this country for a long time. It would almost seem as if people don’t know how to use their cards in a way that helps them. People use credit cards to live beyond their means and buy things they can’t afford. Sadly, the trend is proving true. Americans are saving their credit purchases for something big.

Of course, a person can use their credit cards as they wish. It’s their card and their credit. But there is a smart way to use them that enhances your credit. The other way can hurt you in the long run. People are waiting to use their credit cards until they want to make a larger purchase. The reason why has more to do with time.

Using Cash and Not Credit Cards

It takes longer to use your credit card than a debit card. Signing for your purchase at the end is longer than just inputting your pin. So, those impulse items at the counter, like gum or chapstick, we rarely use our credit to purchase. It’s not worth the time it takes to use the card for the smaller purchases.

“Many people are still going to use cash because it’s so much simpler,” says Certified Financial Planner Pam Horack. “You whip out a five, get your change and you’re good to go.” Another reason is, it’s harder to keep track of smaller purchases that way. It’s easier to use cash for those types of items.

How to Use Credit Cards to Build Credit

If you’re struggling with your debt, using credit cards to make larger purchases can hurt you. Really, the best bet for building your credit is to not take the chance. Buying things you can’t afford is never the smart answer. Rather, spend your credit on the smaller things and keep track of it.

The reason is sound. Using a little bit of credit makes it easier to pay off your cards each month. That means less interest accumulates on your purchases. It means your credit has a better chance at showing 100% on-time payments. That will look more favorable on you when it’s time to buy a house or a car.

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Responsible Credit Card Use

According to Experian: “Having at least one credit card and using it responsibly is a key way to build credit, along with maintaining a solid track record of making loan repayments on time.” If you find that your purchases do not have this effect, then your credit might be souring. Maintaining a good credit score is essential for many important aspects of American life.