In coronavirus economy here's how to pay off credit card debt
Your first step right now should be to ask your credit card issuer for a break.
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About a quarter of Americans with credit card debt have gone deeper into the red during the COVID-19 pandemic, according to a new CreditCards.com report. This represents about 28 million people. Millennials (24-39 year-olds) have been hit the hardest.
Some 34 percent of millennials who owe money on their credit cards have taken on more credit card debt over the past two months. That’s significantly more than Gen Xers (23 percent) and Baby Boomers (15 percent).
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Millennials are also much more stressed about this credit card debt than older adults (58 percent, compared with 49 percent of Gen Xers and 34 percent of Boomers).
Millennials have been squeezed by college, housing and childcare costs that have greatly exceeded wage gains. In fact, adjusted for inflation, Americans’ average hourly wages have barely budged in the past 40 years, according to the Pew Research Center.
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Many millennials were already living close to the financial edge before the coronavirus pandemic, and now that more than 30 million Americans have filed initial unemployment claims over the past six weeks, it’s a very difficult combination.
Many of the usual strategies for paying off credit card debt don’t apply right now. As recently as a couple of months ago, I would have encouraged people with credit card debt to apply for a 0 percent balance transfer card or a personal loan.
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Both remain useful ways to consolidate debt and pay lower interest rates, however, lending standards have tightened considerably because banks are worried about the state of the economy. It’s hard to get approved right now, particularly if you lost your job or have less than pristine credit.
Fundamentals such as upping your income (through a side hustle or a promotion at work) and lowering your expenses are also more difficult during the current crisis.
Right now, I think your first step should be to ask your credit card issuer for a break. Only 7 percent of credit card debtors have tried this. Most banks are lowering interest rates and allowing cardholders to skip payments (sometimes even without interest).
The problem is that help is not automatic – you need to ask, and few people are doing so.
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Connected to this, another good way to tap into your existing financial relationships is to ask your current card issuers if they have balance transfer or personal loan promotions available for existing customers.
Wells Fargo recently emailed me a 15-month 0 percent balance transfer offer on a card that I’ve had for a couple of years. And Chase and Citi both have hybrid credit card/personal loan programs that can repurpose part of your existing credit card limit into a personal loan with a lower interest rate and a more predictable payback cycle.
Your best moves now are to conserve cash and make smart decisions and tradeoffs.
The survey found that 9 percent who have credit card debt are not currently paying their bills, which is alarming. It harkens back to the height of the Great Recession, when about 10 percent of credit card balances were charged off, according to the Federal Reserve.
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One of the things that makes our current crisis so unique is how rapidly it unfolded. Almost overnight, we went from the lowest unemployment rate in 50 years to one of the highest. We can only hope the recovery will be just as speedy.
Unfortunately, politicians and the financial industry are indicating it could be a long haul. New York Governor Andrew Cuomo said on Monday that reopening his state will be “more complicated than the close down,” which he previously referred to as “a blunt operation.” And in late April, Visa CEO Al Kelly said his company is bracing for a tough environment “for a number of quarters.” Visa cardholders spent 19 percent less in April 2020 than they did in April 2019.
Everyone’s situation is a bit different, but all of this makes a strong case that the recovery could take longer than initially hoped. Your best moves now are to conserve cash and make smart decisions and tradeoffs.
Asking all of your lenders for breaks can help you put a priority list together. Typically, necessities such as shelter, food and medicine will come first. It’s OK if you need to carry credit card debt for a while, especially if you don’t have much money coming in or much savings on hand, although ideally, you’ll do so with some relief from your card issuers.
Ted Rossman is the industry analyst at CreditCards.com.