Why seniors with credit card debt could be worse off in 2022

“The Federal Reserve just gave consumers with revolving credit card balances their top New Year’s resolution: Dump that debt ASAP..” So begins a December 17th column in The Washington Post. The question is how do older Americans, especially retirees, dump their credit card debt? Credit card issuers typically base their APR or annual percentage rate on the U.S. prime rate plus a hefty margin to account for credit risk and profit. CreditCards-com reports the average interest rate charged today is 16.13%. Of course, there are cards with much higher rates, some as high as a 24% APR.

So how many seniors are carrying credit card debt? Forbes cites Federal Reserve data revealing…

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an increasing percentage of older Americans are holding credit card debt in the last 30 years, “and their outstanding balances are getting bigger, even when adjusted for inflation”. For example, households with someone 65-74 with credit card debt increased to 41% in 2019 up from 27% in 1989. The percentage of those 75 and older with credit card debt increased to 28% in 2019, up from a mere 10% in 1989.

In the effort to curb soaring inflation, the Federal Reserve announced three planned rate hikes in 2022. The Fed plans to increase the federal funds rate to .9% by the end of 2022, 1.6% by the end of 2023, and to 2.1% by the end of 2024. The danger for credit card holders is if the Fed finds themselves having to increase rates more aggressively if inflation worsens which in turn would increase the U.S. prime rate and subsequently credit card interest rates. If the rate increases are in fact in line with the Feds plan credit card holders would only see a modest increase in interest charged.

So what are older homeowners living on a meager income to do? That was a question posed to Liz Weston in a recent LA Times column. One reader asked, “Dear Liz: My husband is 68, I am 70, both of us are retired and on Social Security. We have little in savings. My husband wants to charge $10,000 to a low-interest credit card to pay for a new furnace and water heater. He plans to pay the minimum each month and at the end of each year transfer the balance to a different credit card with low interest. Is this a good idea?” Weston replies stating they have better options. Options such as a Home Equity Line of Credit or a reverse mortgage. The strategy of shifting credit card balances from one card to another as the reader mentions is a risky strategy at best, and one that may be out of reach should credit card issuers reduce or freeze the available credit should economic conditions worsen.

Considering this, reverse mortgage originators should broach the subject of outstanding credit card debt with potential borrowers. After all, they may be making ends meet today, but their ability to service existing credit card debt could melt away as interest rates rise.

Useful links related to this story:
The Washington Post: Coming Fed rate hikes mean one thing: Pay off that credit card debt. Now.
Forbes: America’s Seniors In Debt: A Growing Problem 
LA Times: Why home equity loans are a better option than credit cards
MarketWatch: Fed accelerates taper of bond purchases, eyes three interest-rate hikes in 2022
The National Council on Aging: Get the Facts on Senior Debt

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