PYMNTS-MonitorEdge-May-2024

Even High Earners Tapping Credit Lines Now to Offset Impact of Inflation

If you were earning $250,000 per year, it seems as if you’d be insulated from the effects of inflation, but in fact, over one-third (36%) of earners in that bracket are spending every cent, every month.

That’s a cold slap of reality for many of the most well-compensated Americans and, as we drop into lower income brackets, it gets worse, as would be expected. Yet paycheck-to-paycheck living in the U.S. today is predominant across all income brackets, and more and more of us are turning to revolving credit to fill in the gaps.

And that’s a risky move, as LendingClub Financial Health Officer Anuj Nayar told PYMNTS — because there are more cost-effective ways to bridge the paycheck-to-paycheck divide.

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

The latest installment of the series “New Reality Check: The Paycheck-To-Paycheck Report: The High Earners Edition,” based on a survey of over 4,000 U.S. consumers conducted in April, notes that consumers living paycheck to paycheck without issues paying their bills carry an average balance of 48% of their credit limit, while those with issues paying their bills tend to use 87% of their credit limits. Currently, the average credit limit sits at around $4,230.

“I use my credit card probably daily. It’s a great way to bring convenience to your purchases,” Nayar said. “But if you’re not paying it off every month, you’re basically taking out a high-interest, revolving personal loan. As interest rates continue to rise, that’s going to cause you more and more problems as your monthly payments are going to start shooting up.”

Clearly, it’s a real and growing problem in a turbulent economy. There are other lending solutions to manage monthly bills without becoming a perpetual credit card balance “revolver” as roughly 40% of respondents from the latest study categorize themselves.

Get the study: New Reality Check: The Paycheck-To-Paycheck Report: The High Earners Edition

Personal Loans vs Credit Cards

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

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

In late May, three-year fixed-rate personal loans became more affordable, averaging a widely reported rate drop to 11.10% compared to 11.53% a year ago, versus interest rates hovering in the 18% range for new credit cards and at over 14% for existing cardholders.

That makes a difference. With the Consumer Price Index showing inflation increased 8.6% over the past year, Nayar noted that gas prices now average $5 per gallon nationwide, skyrocketing to $8 in major metros and placing intense pressure on even the highest earners.

“Putting it into context, that’s like $200 a month that you are spending more on gas. The average annual payment is now over $5,000 compared to $2,800 a year ago,” he said. “For most people, gas money isn’t discretionary spending. It’s getting to work, it’s getting to school, it’s running your life, and $200 a month just disappearing off the top of it, plus food costs shooting up, is hitting all of us.”

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

Observing that credit card use cratered in 2020 and 2021 due to the one-two punch of lockdowns and stimulus payments, he said, “now we’re back to pre-pandemic levels. It went back to $1 trillion of unsecured spending.”

Over LendingClub’s 15-year history, Nayar said, the company has seen it before. When credit card spending picks up and interest rates increase, credit card rates will naturally increase, as well — and more people will start missing payments. Invoking the market crash of 2008 and multiple interest rate hikes by the Fed expected this year, he’s seen more people start looking for better ways to manage their money and credit.

“We’ve seen that as a huge opportunity for LendingClub. As the macro environment changes, people look for better ways to manage their credit, like installment loans that LendingClub offers. I think we’re going to continue to see this.”

See also: The Data Point: Paycheck-to-Paycheck Reality Is Reality for Over 6 in 10 Americans

We’ve Been Here Before

Compounding the credit card interest rate dilemma is the surge in buy now, pay later (BNPL) usage, which can be helpful or harmful to a consumer’s financial well-being depending on how deep they get in, and their ability to pay balances each month to avoid penalties and interest.

Some are using BNPL in much the same way they’re using credit — and in a further sign they’re becoming over extended, they’re missing more installment payments.

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

It happened with lay-away plans in the 1930s, he said. “It’s going to happen again with [BNPL], and we’re going to be there to help our members manage against that as things progress.”

Nayar doesn’t have a doom-and-gloom outlook on the economy, telling PYMNTS, “Consumers entered the pandemic with record levels of savings. Those are going down, but I was at [San Francisco International Airport] last week, and it is packed. People are traveling. We are seeing the economy come back pretty dramatically in the first half of this year.”

However, he said, “As we see the effects of the Fed rate increases, as we see the effects of just people looking at their expenses and realizing that their core household expenses have shot up in the first six months of this year, we’re going to have to see what happens in the second half as those affairs feed into the overall economy.”

PYMNTS-MonitorEdge-May-2024