Consumer debt: Financial experts sounding alarms

Millions of Americans can pat themselves on the back for keeping their finances under control throughout the uncertain economic climate of the past year and a half.

Many people improved their credit scores, cut debt, increased savings and hit other financial progress milestones.

But millions of others haven’t been so fortunate.

And with stimulus payments a thing of the past and other unusual financial stabilization programs unwinding, the alerts are going out again, with experts warning about rising consumer debts. Deborah Wang knows the feeling. The single mother had been struggling with debt for a decade, initially with a mortgage on a home that she kept and later with mounting credit-card balances, medical bills and a car loan.

“It was one thing after another,” said Wang, a 53-year-old hospice nurse who lives in the Phoenix suburb of Anthem. Despite earning a good salary, she continued to run up balances.

““I wasn’t using credit wisely,” she said. “I was using credit cards to make ends meet.”

By 2018, when she reached out for help, Wang had more than $60,000 in non-housing debt, mostly on credit cards and medical bills plus an auto loan.

Wang said she was making around $500 in monthly credit-card payments while accruing $450 a month in interest charges.

“I was making no progress,” she said. “The interest was killing me.”

Wang sought help and succeeding in consolidating her credit-card debts and reducing the interest rates on them to an average 9.9% from more than 20% previously. She handled the medical debts on her own, as they didn’t carry interest charges, and the auto payments.

She worked with Money Management International, a nonprofit financial counseling agency which in late October

received a $500,000 grant from Arizona to help the state’s residents repay debts and balance budgets.

After three years, Wang said she paid off her card balances in early 2021 and has resolved to keep them paid.

Meanwhile, she has been able to sock away money in a savings account and contribute to a workplace retirement plan and has seen her credit score jump by more than 100 points.

All but one of her four kids are old enough to live independently, which also helps, and she continues to drive a 2014 Nissan Altima with 225,000 miles on it rather than buy or lease a new vehicle.

“For the first time in my life, I have an emergency fund,” she said. “I have other financial goals, too, and can actually see them.”

Nationally, debt problems haven’t reached acute levels and, in some respects, have improved substantially.

But the end of various support programs could turn the recent tailwinds into a headwind.

Here are some areas to watch in coming months.

Credit cards under control, for now

Credit cards are a potential source of worry, but for now, Americans are handling their payments.

In fact, delinquencies on cards issued by banks fell to a record low in the second quarter, reported the American Bankers Association, which has been tracking this information since 1993. Third-quarter figures aren’t yet available.

Still, card usage is starting to inch higher, with Americans owing balances of $787 billion in the second quarter, up from $770 billion in the first, reported the Federal Reserve Bank of New York.

That was the first increase after four straight quarterly declines.

Given the double-digit interest rates that most cards carry, consumers can’t afford to become complacent.

Student loan payment shock nearing

Student loan balances dipped a bit in the second quarter but might represent more of a problem than credit cards.

Most borrowers were enrolled automatically in 18-month forbearance programs that started to end in September, said Kate Bulger, senior director of business development for Money Management International, the non-profit group.

Roughly one in four working adults has these debts, for which the average monthly payment is around $400.

Because student-loan payments are fairly large and because most borrowers haven’t had to worry about making them for the past year and a half, the resumption of payments could come as a shock for a lot of people, Bulger said. “This is the (debt category) I’m worried about most,” she said.

Debilitating medical debts possible

Money Management International and others have been warning about medical debts, partly because many people who were stricken with COVID-19 wracked up tens of thousands of dollars in bills to treat the disease and might have missed out on thousands of dollars in lost wages.

Before doing anything, people facing high medical bills should make sure the charges are accurate, the agency suggests. Verify that the services performed were listed correctly, along with the proper charges, dates and doctors involved. If incorrect charges are discovered, ask that they be removed.

If you anticipate payment problems, try contacting medical providers to inquire about financial assistance. You might be able to qualify for free or discounted care if you were treated at a not-for-profit hospital, or you might be able to negotiate a long-term payment plan, Money Management International suggests.

Just don’t charge the balance to a credit card, as doing that likely will start to accrue interest.

Uneven recovery ahead

As with national income and wealth trends, the economic recovery has been uneven.

People who held onto their jobs and saw their homes and stock-market portfolios rise in value have fared well, while many others have struggled.

In fact, consumer bankruptcies — a key indicator — remain a bright spot so far, with the number of filings down 25% over the first 10 months of this year compared with the same stretch in 2020, according to the American Bankruptcy Institute and researcher Epiq.

But bankruptcies are a lagging indicator, as people often don’t file until after they have been struggling with debts for months or even years.

Although filings are at a historic low, the expiration of government-stabilization programs, diminishing lender forbearance and other challenges don’t bode well, said Amy Quackenboss, American Bankruptcy Institute’s executive director.

According to Money Management International, common signs of financial stress include collection letters piling up, a high or rising number of phone calls from creditors, a person’s pronounced unwillingness to discuss finances and repeated requests to borrow money.

“We do expect to see another surge of people reaching out for help,” said Thomas Nitzsche, a Money Management International spokesman.