Nick Wolney
speaker
54 appearances
1 recordings
1 series
first heard Dec 2024
last heard Dec 2024
Nick Wolney’s voice in public audio — every appearance, attributed to the second.
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Appearances
But then when those ended and inflation reared its ugly head and came back around, it really caught people off guard and they're digging themselves deeper and deeper into debt in order to make ends meet.
I'm Nick Wolney, and I'm a managing editor at CNET and a finance journalist.
In Q1 of 2024, the Federal Reserve reported that the average credit card rate is 21.59%. This is a record high. We've been above 20% for a year. And for retail cards, Target, or you go to wherever it is, and I'm just trying to buy dish soap, and they're like, you know, do you want this card? Do you want the red card? You know, all those retail cards, those tend to have an average closer to 30%.
And so in the moment, if someone is cash strapped or particularly there tends to be something like sign-on bonus or perhaps a credit, an opportunity to save some extra money in the moment, a lot of people will fall prey to that and not realize that they have this 30% interest charge that is accruing on this. And they just have this lagging credit card debt that persists as a result.
I don't think so. When I interviewed a financial planner at Northwestern Mutual last year, she pointed out that her clients would regularly say, oh, I'm good. I'm making the minimum payment. I'm good. I'm paying my credit card. And she's like, no, that's the minimum payment. And these are the people who are probably more fiscally savvy if they've hired a financial advisor.
If you've hired a financial advisor at Northwestern Mutual, you're probably at least thinking about your money and about your expenses and things like that. And those people are saying, oh, I'm good. I'm making the minimum payment. I'm good. It's quite hard to visualize how much something actually costs when you're just making these very, very small payments.
And it's difficult for us, I think, to realize the total amount of interest and how much extra interest we would pay.
You know, credit cards didn't used to be as profitable as they are right now. And it also used to be that the minimum monthly payment was 5% of your balance. In the 1980s, some very smart mathematicians realized that if they made two tweaks to credit card culture, there'd be a lot more profit to be made.
And those two tweaks were to lower the minimum monthly payment from 5% to 2%, and then to increase people's credit limit. And so it makes the consumer feel good in the moment because rather than being almost maxed out on your credit card, if you have a much higher limit, you're not as maxed out. You've got a lot of wiggle room.
And then if your minimum monthly payment is less, then it's like, oh, this is not so bad. It's only 2% of my balance rather than 5% of my balance. What that all meant is that people were more likely to have higher balances.
Someone I spoke to last year as well talked about it. His name is Josue Henriquez, lives in San Francisco. And he talked about how when he emigrated to the US, he wanted to build his credit to eventually buy a house one day. And so he took out a credit card when he was 18 and he got a $500 limit, which does not exist anymore.
But over time, as his limit increased, as he got more credit card offers, fast forward 10 years, He's $25,000 in debt. He has to work with a debt consolidation company to pay it all down. Completely wrecks his credit score because of what's needed in order to work with those creditors and things like that. And then during COVID, he lost his job.
And so even though he had paid it all down, you know, after... seven or eight months, he was back to $20,000 in credit card debt just to make ends meet. And I think that him sharing that story with me just felt like something that is a paradigm for what a lot of people are experiencing with credit cards. You know, they're just trying to make ends meet. They're just trying to survive.
They're slowly trying to pay it down and pay a little bit extra every month or every other month. But because people have so little in savings, you know, you're one car problem away from being knocked all the way back to the beginning, so to speak.
One group that's having a hard time when it comes to credit card debt is Gen Z. A report from the Federal Reserve Bank of New York found that one in every seven Gen Z credit card borrowers are completely maxed out on their balances. One factor to this is that Gen Z credit card holders have much lower limits to begin with.
So the median credit limit for Gen Z was $4,500, whereas it's over $16,000 for all the other generations. But it illustrates how younger borrowers get trapped in this cycle right from the start, especially when they either aren't earning enough or they're using a card as their emergency fund since they don't have that safety net established yet.
There was also a recent study from TransUnion, which found that 84% of 22 to 24-year-olds had a credit card in 2023. When that same age bracket was measured with millennials back in 2013, only 61% of them had a credit card. So it's not really a kids being kids argument.
Whether they want to or they need to, Gen Z consumers are opening up and using their credit cards sooner than previous generations.
Utilization is a pretty chunky part of credit score. It accounts for 30% of the overall FICO score. So in the moment, as long as people are paying their credit cards and they're not maxing themselves out in terms of their balances, it won't necessarily impact their credit score. Delinquency does impact the credit score, right?
If you start missing payments, then you're going to get dinged for that. It's also a great point that credit score culture in general, it's kind of twisted. And for most people, when they're young, the easiest way to build up your credit history and to get a line of credit of some kind is the credit card. That's the fastest way to open up a line of credit in most cases.
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