NerdWallet's Smart Money Podcast - Money News: Conquer Your Part of $1.2 Trillion in U.S. Credit Card Debt

Episode Date: January 17, 2024

Understand the implications of Americans’ $1.2 trillion credit card debt, the latest inflation stats, and SAVE plan news. Are you eligible for student loan forgiveness if you’ve been on the SAVE plan? What do the Commerce Department’s latest inflation figures mean for how much things cost? How can you pay off debt, which more Americans faced in 2023 than in the previous year? Hosts Sean Pyles and Anna Helhoski break down this week’s headlines to help you understand how they could affect you — and your wallet. You’ll learn about what makes certain people on the SAVE plan (Saving on a Valuable Education) eligible for student loan forgiveness, how recent inflation numbers could impact your expenses, and a reminder as to why you should be mindful of financial scams. Plus: longtime podcast host Sara Rathner joins Sean and Anna to discuss the results of NerdWallet’s annual household debt study, providing essential insights into the challenges faced by those with revolving credit card debt and offering practical steps for navigating the complexities of household finances. In their conversation, the Nerds discuss: personal finance news, NerdWallet’s annual household debt study, credit card debt, student loans, student loan forgiveness, inflation, Commerce Department, interest rates, Andy Cohen, financial scams, debt management, debt crisis, the US economy, financial burdens, and managing household finances. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Helhaski. And this is our weekly personal finance news roundup, where we take a look at recent developments in the world of money and then go in-depth on an issue that's important to your life and your bottom line. This week, we're going to hear about NerdWallet's annual household debt study. Sean, you want a staggering preview number? Hit me.

$1.2 trillion. That's how much credit card debt we've racked up as a people. Ouch. Well, more on that in a minute. First, a few money headlines from the last few days. So, Anna, any chance we have some student loan news this week? Oh, there's always a chance, Sean, and this week is no exception. Here's something for anyone who is on the Saving on a Valuable Education plan, or SAVE. If you originally borrowed $12,000 or less for college, you are now eligible for loan forgiveness after as few as 10 years of repayments. This was announced by the Department of Education late last week and starts in February. So if you borrowed $12,000 or less for college and you're enrolled

in the plan and you've already been paying for 10 years, your loan or loans will disappear automatically as soon as next month. Poof. So the Ed Department is strongly encouraging federal student loan borrowers to get themselves into the SAVE plan. And what if you have more than $12,000 in debt? Well, there's a formula for that as well. For every $1,000 above that $12,000 threshold, there's one more year of repayment before forgiveness kicks in. So for example, if you have $15,000 in loans, they'll be forgiven after 13 years of payments. And the repayment timeline will also be shortened for borrowers with $21,000 or less in loan debt. The education department says

there are currently 6.9 million borrowers on the save plan. So that's a lot of forgiveness coming their way. Here's another reliable subject matter for our wallets, inflation. Yeah, if you spend your money on, well, anything, you'll want to know if and how much the cost of things is rising. The Commerce Department issued the latest figures for December and prices were up 0.3% from November and up 3.4% from December of 2022. Gas prices were pretty flat, but the cost of shelter, car insurance, and healthcare all rose. Take out volatile food and energy prices, and the so-called core rate of inflation was 3.9% for the year. Most of that, again, because of housing costs, which won't surprise anyone who got a mortgage or saw a rent increase last year. But if you compare that to the end of 2022, which had an overall inflation rate of 6.5%.

Price hikes are definitely slowing down. Some prices are dropping, but for most things, the pace at which they're increasing has slowed. And of course, the Fed is watching these numbers closely as they make decisions about whether to raise or lower interest rates. The next Open Market Committee meeting is at the end of the month. And our final headline for this week, Anna, comes from reality TV land. Did you win Survivor, Sean? No, I got voted off the island for reasons that I'll never quite understand. But Andy Cohen has survived a massive financial scam. For those who aren't immersed in the Real Housewives series or

don't watch his New Year's Eve TV specials with Anderson Cooper, Cohen is a famous Bravo TV host. And recently he started sharing the story of how he was conned out of what he says was a large amount of money. Yeah, this is so awful for anybody. So basically he lost his debit card and the next day he got an email that looked like it was from his bank saying there was a fraud alert on the card. It had a link to his bank and told him to sign in. And that's when the trouble started. Well, actually, it started with that email because it was what's called a spoof. It actually wasn't his bank, but it did direct him to his bank sign in, which he did, giving the scammer access to his account. Then they apparently asked for his Apple ID, which he thought was fishy, so he got out of his bank page. Then came texts and requests for codes. Long story short, and there are some details you might want to look up and read about so it doesn't happen to you. Cohen hasn't disclosed how much he

lost, but given that he felt it was important enough to go public, it was probably more than a few hundred bucks, right? Yeah, and this was a public service on his part. He didn't have to go public and he admitted it's embarrassing, but this stuff happens so often to everybody, including celebrities. We're going to do a whole series on scams in April. So keep an ear out for that. But in the meantime, be careful, be careful, be careful. If your mom tells you she loves you, check it out. Same if she calls and asks for your ATM code, because it's probably not her. That's what we saw and heard about over the past week in Money News. Let us know we missed and send us the headlines you've seen and want to hear more about.

And now on to our in-depth look at household debt in America. We're joined now by a familiar voice, our co-host Sarah Raffner, who's with us as the expert today here on Money News. Hey, Sarah. Hello from the proverbial other side of the microphone. Nerd Wallet's annual household debt study found that all types of debt were up in 2023 compared to 2022, from credit cards to home loans, auto loans, and student loans. And the findings also show that people are, perhaps unsurprisingly, pretty stressed about their credit card debt. So what's going on with debt overall, Sarah? Well, bottom line, it's up.

But a little bit first about this study. It analyzed government data and commissioned the Harris Poll to survey more than 2,000 U.S. adults, of which 796 currently have revolving credit card debt. It asked Americans with that revolving debt what emotions their debt brings up for them and what roadblocks they see to paying off their credit card debt in the next 12 months. So I said it was up. How up? Credit card debt is up nearly 16% compared with last year. That's as of September 2023. And the average U.S. household with revolving credit card debt owes just over $20,000.

Sarah, that's a lot of debt. So what's driving this and how do interest rates come into play? It's that combination of two words that start with I, inflation and interest rates, just meeting together in a perfect storm, essentially. Let's talk about interest rates for a moment first. The average credit card interest rate is 22.75%. That's really high. And that's as of November 2023, which is the most recent data we have available from the Federal Reserve. Now, it is down a smidgen. The highest it reached was 22.77%, which is really just two hundredths of a percentage point higher. It's not

that significant. Yeah, down 0.02%. Yeah, either way, we're talking really high interest rates on and that's the average. There are cards that charge nearly 30% APR. Mortgage rates, incidentally, also hit their highest point ever. In October of 2023, that was 7.79%. So anybody who was house hunting late last year can tell you what a disaster that was. Those numbers are down. So anybody who's house hunting this year might be having a slightly easier time of it, but it is still quite high. So what does that mean? Higher interest rates mean that debt is more expensive to get into and it's harder to get out of once you're in it. And the study calls out that just two years earlier in August of 2021, the average credit card interest rate was 17.13%. So if you assume a steady credit card debt of $10,000, the current interest rates would cost

you $564 more per year in interest today than it would have cost two years ago. Oof, that's brutal. Now, Sarah, you mentioned inflation has been a contributing factor. So even though unemployment is very low and wages have increased over the last few years, costs have also really shot up. Yes. Wages have not increased enough to account for how much more things cost. Since 2019, costs are up nearly 20%. Median income in the same amount of time has grown 12%. For those keeping track at home, that's less. So that means that things that we need to buy cost so much more that our income can't keep up. Now, credit card debt is often portrayed as the result of frivolous spending.

You're going out and you're shopping and you're having fun and you're going out and you're YOLOing and you're getting bottle service. No. many Americans, credit card debt happens because the things you have to buy cost a lot. Food, housing, transportation, medical care, child care, all of these things have increased more than median income over the past four years. Here's some more stats from our survey. We found that 48% of Americans with revolving credit card debt say that spending on necessities is what contributed to their balances. 31% with revolving credit card debt say they need to use a credit card to make ends meet. And 33% say they believe credit cards are necessary to make it in America if you aren't rich. So Sarah, it's clear that the one-two punch of inflation and higher interest rates is tough

on many Americans. So what is most preventing consumers with debt from paying it off? A big one are unexpected large expenses. That can surprise anybody and not in a good way, especially if you don't have a large enough emergency fund available to cover the cost. Also, what's affecting people are job security or a possible decrease in income that makes it harder to afford expenses. And also talked about student loan payments earlier this episode. Those started up again for borrowers with federal loans in October of last year after a three-year break. So suddenly you've got another monthly expense back on your budget that can make it hard to have money available to meet

other financial obligations. So Sarah, we know credit card debt is high. We know people are having difficulty repaying those balances and it's stressing them out a lot. So what can they do? What's the first step to reining in that debt? Step one is get a sense of where you stand today right now. You could look at your most recent statements for credit cards and other debts just to find out what is your remaining balance and what's the interest rate you're paying on each of these debts and make a list. You could use that list to prioritize your debts based on different factors. There are different loan repayment methods like Debt Avalanche or Debt Snowball where

you either prioritize the debt with the highest interest rate first or the debt with the lowest balance first. There are different reasons why you might choose those. Debt avalanche, mathematically speaking, will lower the amount of interest you pay overall, but debt snowball might be more motivating because you knock off little debts really quickly. So you shorten your list of debts fast. Then if you're truly in over your head and you don't have the money available to meet those debt payments, that's where nonprofit credit counseling agencies can be helpful. They can be a resource to you to look over your budget, to help you negotiate your debts, and to help you figure out your next steps.

Sometimes it's really helpful to bring in a third party so they can see your overall picture in a way that you can't necessarily see when you're in the weeds. So Sarah, in the household debt study, it said that nearly one in five say credit card debt is worth it because of the rewards. So are rewards worth it? Not if you're in credit card debt. Sorry, if you have credit card debt, this is not the time to focus on cashback or travel rewards as sexy as they might be. They're not for you in this moment because the amount that you'll pay in interest

will wipe out the value of those rewards in as little as a few months, possibly before you even have the chance to cash them in for something. So instead, look to ways you can lower your interest. And Sarah, how do you actually do that? How do you lower that interest rate? One thing you can try is calling the number on the back of your card and talking to customer service and seeing if you'd be eligible for a lower interest rate. It will not hurt just to ask even if the answer is no. So it's definitely worth a few

minutes of your time. If the answer is no. So it's definitely worth a few minutes of your time. If the answer is no, you can look into other ways to lower interest like a balance transfer credit card if you'd be eligible. Typically, you need good or excellent credit scores to qualify for those types of cards, but they give you a long amount of time, a year or more, with a zero interest promotion. And that can give you time to become debt free and save substantially on interest while you're making those payments. Another thing you could do is consolidate your credit card debts with a personal loan. It's not going to be interest free, but if you qualify for a loan with a much lower interest rate than your credit cards are charging, that could be a way to save. Well, Sarah, thank you so much for coming on and explaining the state of American debt and

what folks can do about it. Thanks for having me. And that's it for this week's money news. We always welcome your money questions and comments. Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. Or send us a voice memo at podcast at nerdwallet.com. And remember to follow, rate, and review us wherever you're getting this podcast. Today's episode was produced by Tess Biglin and edited by Amanda Derengowski. Sarah Brink mixed our audio. Here's our brief disclaimer. We are not financial or investment advisors.

This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.