Even the highest earners limit their credit limits

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If you were earning $250,000 a year, it would seem like you’d be immune to the effects of inflation, but in fact, more than a third (36%) of earners in this bracket spend every penny, every month.

It’s a cold slap in the face of reality for many of the highest earning Americans, and as we fall into the lower income brackets, it’s predictably getting worse. Yet paycheck-to-paycheck living in the United States prevails across all income brackets today, and more and more of us are turning to revolving credit to fill the gaps.

And it’s a risky move, because loan club Financial Health Officer Anuj Nayar says PYMNTS — because there are more cost-effective ways to bridge the paycheck gap.

“When used responsibly, [credit cards are] a very important part of how people are starting to manage their money, he said. “But a lot of people get into the problem where they don’t repay every month and start going into long-term debt, which becomes massively corrosive to your financial well-being.”

The latest installment in the “New Reality Check: The Paycheck-To-Paycheck Report: The High Earners Edition” series, based on an April survey of more than 4,000 U.S. consumers, notes that consumers live off a check payroll to another without having problems paying their bills. have an average balance of 48% of their credit limit, while those who have difficulty paying their bills tend to use 87% of their credit limit. Currently, the average credit limit is around $4,230.

“I use my credit card probably daily. It’s a great way to bring convenience to your shopping,” Nayar said. “But if you don’t pay it off every month, you’re basically taking out a personal loan High Interest Renewable As interest rates continue to rise, this is going to cause you more and more problems as your monthly payments will start to skyrocket.

Clearly, this is a real and growing problem in a turbulent economy. There are other lending solutions for managing monthly bills without becoming a perpetual credit card balance “revolver,” as about 40% of respondents in the latest study self-rank.

Get the study: New Reality Check : The Paycheck-to-Paycheck Report : The High Earner Edition

Personal loans vs credit cards

While responsible use of credit may be a viable short-term paycheck strategy for those who can pay off their balances monthly, millions of consumers cannot. And they might be wise to consider a personal loan.

“One of the things that we think is a really effective way to take control of your finances and start managing your debt responsibly is to turn it into an installment loan,” Nayar said of LendingClub. “That way you have a fixed payment, you start paying from day one, and you have an end date.”

In late May, three-year fixed rate personal loans became more affordable, with a widely reported average rate cut to 11.10% from 11.53% a year ago, against interest rates hovering around 18% for new credit cards and over 14% for existing cardholders.

It makes a difference. With the consumer price index showing that inflation has risen 8.6% over the past year, Nayar noted that gasoline prices are now averaging $5 a gallon at the moment. scale, skyrocketing to $8 in major metropolises and putting intense pressure on even the highest earners.

“Put it in context, it’s like $200 a month you’re spending more on gas. The average annual payment is now over $5,000, up from $2,800 a year ago,” he said. “For most people, gas money is not a discretionary expense. It goes to work, it goes to school, it runs your life, and $200 a month just disappears, plus exploding food costs hit us all.

Encouraging consumers to build a small cushion to use as an emergency fund, Nayar said the trend of credit overuse is troubling.

Observing that credit card use collapsed in 2020 and 2021 due to the double lockdown and stimulus payments, he said, “We are now back to pre-pandemic levels. He returned to $1 trillion in unsecured spending.

In LendingClub’s 15-year history, Nayar said, the company has seen it before. When credit card spending goes up and interest rates go up, credit card rates will naturally go up too – and more people will start to miss payments. Citing the stock market crash of 2008 and the multiple Fed interest rate hikes expected this year, he saw more people start looking for better ways to manage their money and credit.

“We saw this as a huge opportunity for LendingClub. As the macro environment changes, people are looking for better ways to manage their credit, such as the installment loans offered by LendingClub. I think we’re going to continue to see that.

See also: The Data Point: Paycheck-to-Paycheck Reality is Reality for More than 6 in 10 Americans

We’ve been here before

The credit card interest rate dilemma is compounded by the increased use of buy it now, pay later (BNPL), which can help or hurt a consumer’s financial well-being by depending on the depth of his investment and his ability to pay the balances each month. to avoid penalties and interest.

Some use BNPL the same way they use credit – and in another sign they get too long, they miss more installments.

Commenting on Apple’s Pay Later product news, he said: “Our view on this is, again, that this is a new credit product. We’re not sure exactly how this will lock in, but if you’re encouraging spending you can’t afford, it’s going to get you in trouble.

It happened with layaway plans in the 1930s, he said. “It will happen again with [BNPL]and we will be there to help our members manage this as things progress.

Nayar doesn’t have a pessimistic outlook on the economy, telling PYMNTS: “Consumers entered the pandemic with record levels of savings. These are down, but I was at [San Francisco International Airport] last week, and it’s packed. People travel. We see the economy come back quite dramatically in the first half of this year. »

However, he said, “As we see the effects of Fed rate hikes, as we see the effects of only people looking at their spending and realizing that the basic spending of their Households have soared in the first six months of this year, we’ll have to see what happens in the second half as these cases fuel the overall economy.

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NEW PYMNTS DATA: THE CUSTOM PURCHASING EXPERIENCE STUDY – MAY 2022

About: PYMNTS’ survey of 2,094 consumers for The Tailored Shopping Experience report, a collaboration with Elastic Path, shows where merchants are succeeding and where they need to up their game to deliver a personalized shopping experience.


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