Higher prices from scorching hot inflation — and other hiccups — push consumers to borrow

·13 min read

Financial duress crops up in ways you might not expect now that we've been dealing with scorching hot inflation, sky-high gas and grocery prices and too many uneasy feelings about whether the next recession is here or not.

Inflation might have peaked in July, as some believe based on the latest figure. The Consumer Price Index was up 8.5% for the 12 months through July. That's better than June when the year-over-year CPI had increased 9.1%.

The bright spot was that the month-over-month number dropped to 0% in July on a seasonally adjusted basis after rising 1.3% in June, the U.S. Bureau of Labor Statistics reported Thursday.

But it doesn't matter much to those who find themselves juggling costly bills, higher prices and mounting credit card debt — on top of economic uncertainty. Inflation is everywhere and still very high.

A metro Detroit small business owner the other day brought in his Rolex to pawn in order to make a $5,000 payroll at his company, according to Les Gold, owner of American Jewelry and Loan, which opened in 1978 and was later featured on the cable TV reality show "Hardcore Pawn" — located in the heart of Detroit's 8 Mile.

"His people who owed him money didn't pay him," said Gold.

Young families and small business owners who cannot make ends meet lately, Gold said, are among many newer customers now turning to alternative lending at pawn shops to generate a little extra cash to pay bills.

"In our Detroit location, where we normally are, we're seeing a lot more people coming in that we've never seen before," Gold said.

Across town, a 40-year-old mother took out a $30,000 personal loan online via Goldman Sachs at fixed 8% interest recently to deal with her maxed out credit card debt, debt that built up covering higher expenses for four daughters on one paycheck. Her loan also helped with bills that included child care expenses and lawyer fees associated with going through a divorce.

"I used most of it to pay off my cards and I have a little left that I'm trying to use for school supplies, which is what I'm trying to do today," said Dorey Tabor, who had that school list in hand Monday at the Walmart parking lot in Warren on Van Dyke.

Dorey Tabor had the back-to-school list in hand at the Walmart parking lot in Warren on Van Dyke. Tabor estimates that it's going to cost her about $1,000 for school supplies for her four daughters, including a $400 laptop that's required for one daughter. "Every class has their list of everything they want us to bring. They want name brands, Elmers and Crayola and they're the priciest," she said.
Dorey Tabor had the back-to-school list in hand at the Walmart parking lot in Warren on Van Dyke. Tabor estimates that it's going to cost her about $1,000 for school supplies for her four daughters, including a $400 laptop that's required for one daughter. "Every class has their list of everything they want us to bring. They want name brands, Elmers and Crayola and they're the priciest," she said.

Back-to-school spending costs $1,000 for one family

Grumbling about record high gas prices eased a bit, as prices at the pump fell back under $4 or so at many metro Detroit stations. In Michigan, the average was $3.98 a gallon early in the day on Aug. 10, according to GasBuddy data.

Nationwide, the average price for regular gas fell to $3.987 a gallon early in the morning on Aug. 10, down 70 cents a gallon in the past month, according to GasBuddy. Even so, prices are up an average of 80 cents a gallon from the $3.189 average nationwide a year ago.

The highest recorded average nationwide was $5.034 a gallon on June 16, according to GasBuddy data.

Even so, consumers feel financially stressed out.

The problem: Life goes on but it's getting increasingly more costly and complicated for many to figure out how to deal with the road bumps along the way.

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Tabor, the mother of four, relied on credit cards for the past year to pay for gas, groceries and other necessities for her four daughters, the youngest in kindergarten.

"Just basic food prices, it's crazy to just barely have anything in your cart and it's like $150," she said.

She has cut back on the kind of meat she buys to hold down costs, turning more toward frozen processed meat on sale.

"I can't afford fresh red meat," she said. "I still try to do the fruits and vegetables."

She estimates that it's going to cost her another $1,000 for back-to-school shopping and supplies for her four children, including a $400 laptop that's required for one daughter.

"Every class has their list of everything they want us to bring. They want name brands, Elmers and Crayola and they're the priciest," she said.

Tabor has a job as a teacher for the second grade at Marion Law Academy in Detroit and feels good about her work situation but inflation means that she's paying more for everything. Her salary, she said, covers mainly her rent in Grosse Pointe and her car payment on her Dodge minivan, leaving little cash for much else. She has received no child support so far. The girls are staying with their father in Maine this summer.

The personal loan requires sizable monthly payments but brings down her annual interest rates from 10% to 13% on her credit cards — rates that would climb higher with each rate hike by the Federal Reserve — to a fixed lower level of 8% on her personal loan.

Marcus by Goldman Sachs notes online that its personal loan rates range from 6.99% to 19.99% and loan terms range from 36 months to 72 months. "Only the most creditworthy applicants qualify for the lowest rates and longest loan terms," according to the online statement.

Dorey Tabor, 40, expects she'll need to spend $1,000 on back-to-school shopping and supplies for her four daughters. The list includes a $400 laptop for the fifth grader, as required. Her daughters pictured, going clockwise, are: Bealia Tabor 12; Ayla Tabor, 10; Esli Tabor, 7 and Saraya Tabor, 5. They are at Mount Blue State Park in Maine where they camped on a budget. The girls are staying with their father in the summer in Maine.
Dorey Tabor, 40, expects she'll need to spend $1,000 on back-to-school shopping and supplies for her four daughters. The list includes a $400 laptop for the fifth grader, as required. Her daughters pictured, going clockwise, are: Bealia Tabor 12; Ayla Tabor, 10; Esli Tabor, 7 and Saraya Tabor, 5. They are at Mount Blue State Park in Maine where they camped on a budget. The girls are staying with their father in the summer in Maine.

Student loan debt in flux

The stimulus money helped last year, Tabor said, as did the moratorium on making monthly student loan payments on most federal loans. She still had to pay $30 a month on student loans that weren't covered but she was able to stop paying $270 a month for more than two years under the moratorium on her $25,000 in student loan debt.

"I haven't had to deal with those right now, but I still have them. They haven't been forgiven," said Tabor, who will start her third year in Detroit public schools this year and will be researching more options for student loan forgiveness in the future.

The moratorium on federal student loan payments, which has been repeatedly extended, is scheduled to end Aug. 31. Borrowers would need to resume making monthly payments of $250 or $400 or more in many cases in September unless another extension takes place, which is possible.

At the beginning of the COVID-19 pandemic in March 2020, the federal government gave substantial financial relief to about 20 million college borrowers with federal student loans. Payments were suspended, a 0% rate was charged on outstanding balances and collections were stopped on defaulted federal student loans.

Student loan balances now stand at $1.59 trillion, roughly unchanged from the first quarter of 2022, according to the Federal Reserve Bank of New York's latest report.

Tabor worries that Congress doesn't pay enough attention to how many people are just scraping by now.

"It's a hard time for a lot of people," Tabor aid.

Some pull out credit cards to cover higher costs

Credit card debt is going up overall.

Consumers are holding a record 500 million general purpose credit cards, according to the latest data through the second quarter from TransUnion. That's up from about 465 million credit cards a year ago and 439 million cards in the second quarter in 2019 before the COVID-19 pandemic.

Gen Z consumers -— ages 24 and younger now — took on more credit, as more younger consumers and borrowers with lower credit scores gained access to credit cards this year.

Michele Raneri, vice president of U.S. research and consulting at TransUnion, told the Free Press that consumers are definitely starting to use their credit cards again, as they try to get back to their normal lives.

Some may be traveling more and using credit cards to book flights and pay for services and dinners out. Others, though, are turning toward credit to cover the higher cost of living.

"When people have financial challenges, they often turn to credit and the most convenient kind of credit is a credit card," Raneri said.

The average credit card debt per borrower, according to TransUnion data, rose to $5,270 in the second quarter, up from $4,817 for the same period a year ago. In the second quarter of 2019 before the pandemic, consumers had been carrying an average of $5,635 in credit card debt.

Raneri noted that more consumers have gained access to credit when high inflation is putting more stress on their wallets. Delinquencies generally rise when more borrowers with weak credit histories obtain credit. But she noted the rates of delinquency remain mostly at or below pre-pandemic levels, particularly for credit cards and personal loans.

"People are continuing to be employed, which is the No. 1 indicator for people being able to pay their debt," she said.

The popularity of personal loans, often used to cover bigger purchases or pay off credit card debt, also grew. The average personal loan debt per borrower grew to $10,344 in the second quarter, up from $9,079 for the same period a year ago, according to TransUnion.

The Federal Reserve Bank of New York's quarterly report on household debt and credit showed an increase in all household debt in the second quarter of 2022, going up by $312 billion or 2% to $16.15 trillion. Balances are $2 trillion higher than at the end of 2019, before the COVID-19 pandemic.

New York Fed researchers wrote in a blog that the effects of inflation are visible in credit card balances.

"The $46 billion increase in credit card balances this quarter was among the largest seen in our data since 1999," according to the blog.

"Americans are borrowing more, but a big part of the increased borrowing is attributable to higher prices," the researchers wrote.

The research indicated that credit card balances, while up significantly, "remain slightly below their pre-pandemic levels, after sharp declines in the first year of the pandemic."

Credit card rates will go up even more

Right now, many consumers are benefiting from the lowest unemployment rate in 50 years — sitting at 3.5% nationwide in July.

The strong jobs market leaves some experts room to argue that the U.S. economy isn't in a recession yet even though the economy shrank in the first two quarters of 2022 — which has been a benchmark of a recession.

Those who are taking on more credit card debt, though, face higher interest rates immediately as the Federal Reserve moves forward to raise rates. Credit card rates are variable and Fed rate hikes tend to be passed along to credit cardholders within a month or two.

The current average interest rate for credit cards is 17.42%, according to Greg McBride, chief financial analyst for Bankrate.com.

If the Federal Reserve raises short term rates by another 75 basis points at its next meeting Sept. 20 and Sept. 21, as some still expect currently, the average credit card rate would be above 18% by mid-October, he said.

Higher interest rates and continued high prices are expected to put more of a financial squeeze on consumers in the months ahead.

A raise or two won't cover all the bills

Wage gains are helping some families keep going — even if the gains are smaller than the rate of inflation.

Julia Nano, of Fraser, said her husband who is a UPS driver has received several raises but she's concerned about the high cost of food and other goods, as well as the high level of taxes he's paying too. The couple have an 8-month-old son, Noah.

"You've got to provide for the country, the whole country, not just your family, I guess," she said, expressing her frustration about high taxes and welfare programs.

Nano, 19, is returning to college this fall, learning to be an ultrasound technician at Macomb Community College, and expects that she will be able to find a job fairly easily.

The high cost of food, though, has her paying careful attention to what she buys, avoiding meat that's $7 a pound and higher.

Food prices were up 10.9% over the last year ending in July. The food index showed its largest 12-month jump since the period ending May 1979.

The gasoline index fell 7.7% over the month in July but gas prices were up 44% over the year, according to July's CPI data.

Some areas that showed price declines for the month in July, included airline fares, used car and truck prices, and apparel. The index for airline fares fell significantly in July, decreasing 7.8%.

Some stopped buying and began borrowing more

In the early days of the pandemic, Gold — who likes to call himself a "street-level economist" — expected people to need money and pawn electronics, tools, fur coats, luxury handbags and other items for cash. But that didn't happen, only a very small number of loans were done.

Instead, he said, many everyday consumers benefited from stimulus money — driving down their need for cash but leading to a spike in the retail part of the business for pawn shops.

Les Gold inside the pawnshop American Jewelry & Loan located in Detroit. He, along with his two children, and the shop are stars of the truTV show called "Hardcore Pawn."
Les Gold inside the pawnshop American Jewelry & Loan located in Detroit. He, along with his two children, and the shop are stars of the truTV show called "Hardcore Pawn."

People who were flush with stimulus cash bought TVs, video games, laptops and other goods at pawn shops. American Jewelry and Loan even had to buy truckloads of TVs to stock the shelves.

Now, though, the stimulus checks aren't being sent and the higher cost of living has kicked into gear.

"We've seen a significant uptick in loan requests over the past six months," said Seth Gold, vice president of American Jewelry and Loan, which has locations in Detroit, Hazel Park, Pontiac, Southgate and Lincoln Park.

Higher inflation and prices drove up requests for loans, he said. In many cases, customers will come in with the same merchandise that they've been pawning to get extra cash for a while but they're asking for more money for that item to reflect higher inflation.

"Instead of $100 for the item, they're asking for $110," Gold said. "We stretch it out as much as possible. We look at a customer's history. If we can do it, we definitely help that customer out."

The pawn rate in Michigan is 3% a month plus $3 a month storage. No credit is checked; bad credit doesn't matter. When you pawn an item, you’re using it as collateral for a loan. Your loan is for 90 days.

Now, Gold said, the retail business is sliding down as people try to spend less money to cover other bills and the pawn shop side is picking up.

Will he come back for the Rolex?

When there's a typical recession, Les Gold said, there are more loans and retail suffers a little bit. And people don't redeem some of the merchandise that they did pawn.

"People used to redeem approximately 80% to 85% of their merchandise back," Les Gold said.

American Jewelry and Loan President Les Gold, left, and his son and vice president of American Jewelry and Loan, Seth Gold, on Feb. 1, 2018 at American Jewelry and Loan in Detroit.
American Jewelry and Loan President Les Gold, left, and his son and vice president of American Jewelry and Loan, Seth Gold, on Feb. 1, 2018 at American Jewelry and Loan in Detroit.

"Now we're down to 68% to 70% of the people picking up their merchandise because they don't have the means to pay the interest and pick up their items."

It's yet another sign of a financially strapped consumer. Gold says it's hard to say if we're in a recession at this point. Jobs are readily available, he said, but at the same time some companies are cutting hours or closing because they don't have enough employees.

"I do know that people are struggling more."

As for the small business owner with the high-end watch? Les Gold expects that he will be back within 90 days to get the Rolex.

"He'll come back," Gold said.

Contact Susan Tompor:  stompor@freepress.com. Follow her on Twitter @tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.

This article originally appeared on Detroit Free Press: Inflation cools but still pushes some consumers to borrow more