Originally Posted On: https://credello.com
After being cooped up for the past year and a half due to COVID-19, consumer credit demand is surging. Americans are borrowing for high-ticket items like lavish trips and luxury cars at a 10-year high. A recent report from Equifax shows that borrowers are taking out more auto loans and leases, in addition to general-purpose credit cards and personal loans, with a rise of 39% YoY since last April.
This marks a stunning reversal from last year, when borrowing plummeted. Credit cards and loans were not used nearly as much, both from fears about the economy/job security as well as simply not having a reason to purchase anything while being stuck inside. In addition, stimulus checks gave some consumers a financial boost, allowing them to cool their credit card usage. But with the economy reopening and consumer confidence slowly rising, many buyers are ready to make up for lost time.
In this article, we’ll talk about what more borrowing means for the economy, how borrowing can lead to debt, and strategies like the debt snowball method that you can use to get out of debt.
Is more borrowing a good thing?
Borrowing can be a good thing in that it can show that spenders are feeling positively about their job prospects and the economy overall. More spending equals an economic boost that’s great for the economy as a whole. Borrowing can be an issue if individuals start spending more than they’re saving and wind up in debt.
How does inflation affect borrowing?
Inflation is a decrease in money’s purchasing power. With the price of many goods increasing this year due to demand, stimulus money, and supply chain issues, consumers may be noticing that their money isn’t going quite as far. As a result, some individuals may need to use their credit cards more to make up for these price increases.
4 ways to get out of debt
If you’ve been guilty of giving in to a few too many post-pandemic temptations (it’s those in-feed Instagram ads!), don’t stress. Selecting and sticking to a debt repayment method can help you get back on track. Here are a few strategies to consider:
- Debt snowball: With the debt snowball method, you’ll focus on paying off your smallest balance first. You’ll still pay minimum balances on all of your debts to avoid damaging your credit score, but you’ll put any money you have left over toward your smallest debt. Once that’s paid off, you’ll put extra toward the second-smallest debt. The debt snowball can be a good fit for those who need motivation to knock out their balances.
- Debt avalanche: With the debt avalanche method, you’ll instead focus your attention on your debt with the highest interest rate. You’ll continue to make minimum payments, but extra cash will go toward the balance with the highest rate. Once that’s paid off, you’ll focus on paying off the balance with the second-highest rate. The debt avalanche is best for saving money overall.
- Balance transfer: With a balance transfer, you’ll move your existing credit card balances to a new card with a 0% or low-interest promotional period. You’ll focus on paying off your payments during this promotional period (typically between 12-18 months). Balance transfers can help you save on interest while getting out of debt. However, you may have to pay a fee to transfer your money and if you can’t pay off your debts before the promo period ends, you could be stuck paying a high APR on your balance.
Borrowing can be a good thing as long as you’re spending responsibly. Make sure to track your spending and don’t be tempted to swipe too much plastic on a post-COVID shopping bonanza.