After paying off $83 billion in credit card debt during the pandemic, helped by government stimulus checks and fewer opportunities for discretionary purchases, credit card balances have steadily ticked back up.
Credit card balances rose year over year, reaching $841 billion in the first three months of 2022, according to data released by the Federal Reserve Bank of New York.
About 50% of American households who revolved credit card debt paid an estimated $111 billion in fees and interest in 2021. That figure approaches the amount of interest paid by all U.S. families on auto loans and leases.
Using your credit card to get through a difficult financial period is great if you can pay in full, avoid interest and earn rewards, but potentially very costly if you're paying interest every month. Most credit card issuers offer a variable annual percentage rate (APR), which means that the interest rates fluctuate with market conditions.
With the Federal Reserve poised to hike interest rates further, consumers with credit card debt may be plunging themselves into a financial melee. Let's have a look at the reasons for rising credit card debt, and what you can do.
As inflation bites harder, Americans are turning to their credit cards to make ends meet, potentially erasing the financial milestones (such as paying off debt) that they made during the pandemic.
There's a good chance that Americans' total credit card balances will soon reach a new record high, marking a sharp reversal from the precipitous drop that occurred in 2020 and early 2021.
The Federal Reserve’s monthly credit report found that revolving credit, which mostly includes credit card balances, jumped nearly 20% in April. However, the rise in borrowing, together with auto loans, student debt, and mortgages, propelled total household debt to a record $15.84 trillion at the beginning of the year.
Inflation is at its highest level in four decades. To curb rising prices, the Federal Reserve has hiked interest rates, with more expected this year and next.
Since most credit cards have a variable annual percentage rate, there's a direct connection to the Fed's benchmark. As the U.S. central bank jacks up interest rates, it will only get more expensive to carry a balance.
At the end of 2020, the average interest rate on revolved credit card debt was 16.3%, compared to:
APRs are now a little over 16% on average, but by the end of the year, they might be far over 18%.
Most credit card agreements have variable interest rates leaving consumers exposed to higher interest charges when interest rates rise, as they are currently. As a result, credit card debtors may well be paying more money than expected.
Consumers face higher prices for gas, groceries, and housing, among other necessities. In order to keep up with rising costs, consumers are forced to borrow. This is ratcheting up debt, which may be damaging in the long term.
The grim nature of this is that a high percentage of credit card debt is revolving, which means they will be paying higher interest on their principal as time goes by.
This saps their ability to save, exhausts existing credit lines, and builds excessive card debt which eventually leads to delinquency or default.
The pandemic led to an increase in online spending as most companies pivoted to digital payments and eCommerce to keep their businesses running.
The expected change in consumer shopping increased an affinity for cards as consumers considered safety and convenience.
However, the proliferation of eCommerce has also led to more people opening credit card accounts and inevitably more debt. An additional 229 million new credit card accounts were also opened in the first quarter of 2022, up from the previous quarter and higher than pre-pandemic levels.
The average score of adults surveyed in the 2022 P-Fin Index (an annual survey developed by the TIAA Institute and the Global Financial Literacy Excellence Center to test knowledge of personal finance) showed a deficiency in knowledge of personal finance.
On average, U.S. adults correctly answered only 50% of the index questions in 2022. 18% correctly answered over 75% of the index questions, while 23% correctly answered 25% or fewer of the questions.
About 20% of employees noted that they run out of money before the next payday, while more than 30% of American parents have never talked to children about money.
Only 12 states in the US offer personal finance as a standalone course to students. Clearly, the environment does not encourage financial education and independence.
This dire situation has seen more Americans struggle to put food on the table with many turning to credit cards to make ends meet.
Many Americans underestimate how much of each card payment goes to interest rather than to principal. This may lead them to de-prioritize credit card payments relative to payments on other debts (like mortgages or auto loans) where payments are larger but interest costs are less.
Consumers need to act now to knock down that credit card debt because it is only going to get more expensive. Here are some things you can do.
If you're carrying a balance, try calling your card issuer to ask for a lower rate, consolidate and pay off high-interest credit cards with a lower interest home equity loan or personal loan or switch to an interest-free balance transfer credit card.
There is no better time to feel the costs of your financial decisions than now. As such, it is important that you build better credit card habits.
Every action taken to save a penny could have significant effects on your pocket over time.
Spending within your means will leave more money at the end of every month and help reduce your debt. It also helps to build a stronger credit score, which is an added bonus.
When you invest, you are buying a day that you don't have to work.
While debt sets you back, investing allows you to get ahead of the financial curve. It offers an opportunity to earn extra income which gives you a little more room to wriggle your finances.
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