A new federal report shows consumer debt is once again on the rise, reversing a long recession-spurred decline.
The latest monthly Federal Reserve report showed that revolving credit, made up primarily of credit card debt, increased at an annual rate of 4.1 percent in December, rising nearly $3 billion to $801 billion. December marked the fourth straight monthly increase in revolving credit spending, reversing a recession-spurred decline.
That followed a $5.5 billion jump in November, when the Christmas holiday season kicked off during Thanksgiving weekend. That November increase amounted to an annual rate increase of 8.4 percent. While the Federal Reserve report is good news for Alabama and other states, which rely on consumer spending to stimulate their economies, it’s not good for those folks who remain overburdened by heavy debt loads, said Bill Hardekopf, president of Birmingham-based Lowcards.com, a consumer financial education website.
“These credit card debt numbers are a concern but it’s too early to tell whether we are all falling back into the trap of spending more than we can afford,” Hardekopf said. “People certainly charged more this Christmas than last year.”
Hardekopf said the rise in credit card spending could be a positive sign that consumers are more confident in the economy, which was battered by a three-year economic downturn that began in 2007. But, he added, “it could mean that people are struggling and have to rely on using their credit card to make ends meet.”
“Consumers are going into 2012 with higher credit card debt but the same wages,” he said. “If consumers have a hard time paying this down, we might see delinquencies and defaults start to increase by spring.”
Hardekopf, author of The Credit Card Guidebook, said people need to be cautious when spending on credit cards. He said new federal rulings have cost banks and credit card issuers hundreds of millions of dollars, which may have indirectly led to higher rates and fees for consumers.
“Whenever banks incur additional costs or have their revenue stream cut in one area, they typically make up that money by raising the rates or fees in another area,” Hardekopf said. “And we, the consumers, will usually be the ones paying the price for those additional rates or higher fees.”
Two other challenges loom that could come back to bite those who overdo it on credit card spending as the economy improves: an unemployment rate that remains historically high and gasoline prices that are on a pace to this summer surpass the record $4.05 Alabama saw in September 2008.
“Even though the unemployment rate is dropping, it remains historically high and there are still a number of people out of work,” Hardekopf said. “Gasoline may be the only fly in the ointment that hurts an economic recovery. When gas prices go up, everything goes up.”
Debt elimination tips:
Raise your credit score. Pay your bills on time, pay down your debt and limit your credit applications. This will this help you qualify for the best terms and interest rates on loans and save thousands of dollars over your lifetime.
Set up a plan for daily spending. Save for the bigger purchases and occasional splurge without resorting to plastic. If married, make sure both spouses have input. Eat out less or use coupons, and immediately apply the money you saved to your credit card balance. If you have multiple credit cards with balances, pay off the balance with the highest interest rate and then move to the next-highest rate.
Set up an emergency fund. All couples should have an emergency fund of six to eight months’ worth of living expenses held in a safe place such as a money-market fund. Make savings consistent and untouchable by setting up an automated deposit from your paycheck into your savings account.
Monitor your accounts. Even if you divide up bill-paying and investing duties, both parties should be able to easily access accounts to know what is going on with your money.
Source: Bill Hardekopf of Lowcards.com