Cost of Living Outpacing Income

budgetWe took a look at NerdWallet’s 2016 American Household Credit Card Debt Study recently, which shows that overall US household debt has increased by 11% in the last decade. The increase is not driven by profligate spending, but by basic cost of living increases that have outpaced income growth. Medical and housing costs, in particular, are growing at a much faster pace than income. Consumers find themselves relying on credit cards to make ends meet. Households with credit card debt average $16,061 in balances, which costs them about $1,300 a year in interest.

According to the study, household income has grown 28% since 2003, but medical costs have increased by 57% and food and beverage prices by 36%. Overall, cost of living has increased 30%, compared with income growth of 28%, and while that 2% gap may not seem that significant, it can be a huge burden on many Americans who must take on more debt to bridge the gap.

The good news is that education costs have plateaued, and while student loan debt has grown tremendously in the last decade, it is finally slowing down. More students are now opting for nonprofit public universities and colleges rather than the pricier for-profit schools, and some are bypassing college and entering the workforce.

It is NerdWallet’s opinion that the increase in credit card debt does not point to another recession. According to Sean McQuay, NerdWallet’s Credit and Banking Expert, “By all measures, consumers are handling their debt far more responsibly than they have in years past, likely due to a combination of issuers tightening their lending rules and consumers paying their minimums more responsibly.”

Credit Consulting Services plays an important role in debt management for both the creditor and the consumer. Of course we assist creditors in collecting money owed to them by consumers, but we also attempt to educate consumers about the importance of making timely payments, and assist them in learning how to make a plan to get out of debt. Together, we can navigate the tricky waters of the ever-changing economy.

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Credit Delinquency Rising in 2017?

new-carsUS consumers accumulated a record-setting $21.9 billion in credit card debt in the third quarter of 2016, the largest third quarter debt increase since 2007, according to the latest Credit Card Debt Study: Trends & Insights from WalletHub. What is even more concerning is that TransUnion’s 2017 Consumer Credit Market Forecast indicates that delinquency rates for credit cards and auto loans are expected to increase in 2017.

Although delinquency rates are still relatively low compared to the recession years, it is something to watch closely. An increase in subprime lending in Q3 2016 (volume grew by 14.7%) brings with it risks as well as rewards; an increase in card delinquency is a natural result of more subprime consumers entering the market.

Another factor poised to impact delinquency rates is the fact that credit card interest rates may rise as a result of prime rate increases. For consumers carrying a balance on their cards, monthly payment amounts will increase because of the higher interest rates, upsetting what could be a delicate balance in their budgets.

Serious delinquency rates for credit cards and auto loans have also been increasing since fourth quarter 2014. TransUnion defines serious delinquency as 60 or more days past due for auto loans and 90 or more days past due for credit cards.

According to Nidhi Verma, senior director of research and consulting in TransUnion’s financial services business unit, “These projected increases in delinquency are not surprising, nor are they yet a cause for concern. Lenders are adjusting their underwriting strategies to maintain a good balance between expected losses, consumer credit access, customer utility and investor returns—and in the end, that balance is a benefit to all parties.”

We here at Credit Consulting Services will be keeping a close eye on these trends.