Gulp. Talk about a flashing red light.
More than 2 in 5 Americans expect to pile on debt between now and the end of the year, according to a new survey by Lending Tree that polled over 1,000 U.S. consumers. The bulk of that will be racked up on credit cards (22%) and auto loans (10%), according to the survey.
More than half of Millennials (56%) and Gen Zers (55%) anticipate adding more debt this year. Less than half (41%) of Gen Xers expect to accumulate debt, and only 21% of baby boomers do.
Most debt is worrisome. I look at it as a dream killer. And I’ve been there. I ran up credit card debt in my 20s and still feel the knot in my stomach when I remember the relentless calls from creditors. I buckled down, paid those bills, and vowed never to carry any debt beyond a mortgage. I haven’t.
But the survey’s findings are particularly alarming right now because rates on credit cards are typically variable and go hand in glove with the Federal Reserve rate hikes. The rate increase by the Federal Reserve will filter down to interest rates charged for all variable rate loans, of course, from auto loans to mortgages and home equity loans and lines of credit, but, importantly, to the Annual Percentage Rate (APR) or yearly interest rate consumers who carry a credit card month-to-month balance will pay in the coming months.
The average credit card interest rate is now 17.25%, and likely “headed to a new all-time record soon,” Ted Rossman, senior industry analyst at Bankrate.com, told Yahoo Money. “The current high mark is 17.87% from April 24, 2019, and my best guess is that the average credit card rate will end the year between 18% and 18.5%.”
More than 3 in 5 (61%) Americans are already grappling with debt, with credit cards being the biggest culprit (70%), according to the survey. The most common reason for those already carrying a debt load: Necessities (30%), emergencies (26%), and health or medical issues (25%).
True. Not all debt is created equal. A mortgage, for instance, can ultimately create wealth and the ability to write the interest off on your tax bill makes it attractive.
But if history is a guide. I’m deeply concerned about those anticipating adding more debt. More than 4 in 10 Americans have borrowed their way toward attempts at happiness, according to a LendingTree survey of more than 2,100 consumers nationwide released earlier this year.
Nearly 9 in 10 Americans (88%) have spent money on something to make them happier — and 43% have gone into debt to do so. Travel and food are the top items consumers purchase to find happiness (both 45%), followed by shopping sprees for clothes, shoes or accessories (42%).
But how happy are they now trying to pay it off? So I toss out a lifeline right now for those planning to soak up more red-ink spending this year.
If you must spend, look for a low-rate credit card to tap. If you’re already swamped with a high-interest payment, apply for a balance-transfer card that typically comes with a one-time 3% to 5% fee on the balance you are moving.
“These offers typically last up to 21 months,” Rossman said. “The ability to avoid interest for nearly two years is a powerful tailwind that can help you get out of debt, saving hundreds or maybe even thousands of dollars in interest charges.”
Contact your creditors about getting a reduced interest rate or deferring or extending loan payments. Some creditors might remove fees if you’ll agree to make your monthly payments going forward or if you’ve always made timely payments in the past.
If you’re trying to pay down debt, an alternative might include a low-rate personal loan. “This is a form of debt consolidation that could charge as little as about 6% over five years if you have good credit,” Rossman said.
Nonprofit credit counselors may also be able to help you with a debt management plan. You’ll typically pay a fee, but they negotiate for lower rates from your credit card companies. A roster of approved credit counseling agencies can be found on the Justice Department’s website.
Taking control of your spending
But let’s get down to the nitty-gritty. The best way to stay out of debt right now is to pencil out a budget.
Don’t glaze over. You can do this. Mapping out your budget is a great way to help you quickly uncover whether you’re on the rocky road to spending more than you make — as I was for a while after college.
To begin budgeting, first add up the essentials, such as your mortgage or rent payment, health insurance premiums, utilities, and so forth. That’ll let you know how much is left over for other spending and saving.
Then keep a notepad handy and write down every single item or service you shell out money for over a two-week period. This gives you a snapshot of how you spend your money and even your time.
Be conscientious about socking money away regularly, even a small amount, so you’ll be able to get what you can’t have today — whether that’s a car, a vacation, a house, whatever. I set photographs around my work desk of where I’d like to travel or to live one day, for example. That motivates me to save and invest.
Automate monthly bill payments and savings. Schedule an automatic transfer from your checking into your savings to account each month, or to your credit card issuer. Even $100 a month creates a habit, builds an emergency fund, and for recurring bills, even if it is just the minimum due, you’ll avoid late fees
Ramp up your financial knowledge. Saving is a habit. If you don’t feel confident about building your financial life and future financial security, knowledge can ease that anxiety and motivate you. Books to consider:
“Get a Financial Life: Personal Finance in Your Twenties and Thirties” by Beth Kobliner
“Broke Millennial: Stop Scraping By and Get Your Financial Life Together” by Erin Lowry
“How to Think About Money” by Jonathan Clements
"Get Good With Money: 10 Simple Steps to Becoming Financially Whole" by Tiffany "The Budgetnista" Aliche
“Money Magic: An Economist's Secrets to More Money, Less Risk, and a Better Life" by Laurence J. Kotlikoff
"How to Make Your Money Last: The Indispensable Money Guide" by Jane Bryant Quinn
You might begin by tracking your finances on sites like Mint.com or YouNeedABudget.com. There are also some great podcasts out there to consider such as Friends Talk Money.
Consider starting a money circle with a handful of friends where it’s a safe place to talk about money and savings, your worries, and ask questions. This regular get-together can help keep you accountable for getting out of debt and making smart money decisions.
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon