A growing number of Americans are facing potentially crippling credit card debt.
Americans are piling up credit card debt just as interest rates are reaching all-time highs.
Multiple surveys show that American consumers are sinking deeper into credit card debt. A new survey from Bankrate, the consumer finance company, found that 46 percent of cardholders carry credit card balances month-to-month, up from 39 percent a year ago.
A survey by NerdWallet, the personal finance company, found that the average American household carrying $7,486 in credit card debt, an increase of 29 percent over the previous year. A third survey, from the personal finance website GOBankingRates, found that 14 million Americans owe more than $10,000 in credit card debt.
Card balances are mounting at a time when consumers may find it harder than ever to pay them off. Credit card interest rates reach 20 percent by the end of 2022, according to the Federal Reserve, the highest level in nearly 30 years of tracking.
Buy now and pay later is a classic consumer impulse.
“Americans love their credit cards,” said Matt Schulz, chief credit analyst at LendingTree, the consumer finance company. “We always have credit card debt, and it’s almost always increasing.”
the collective of the nation credit card balance totals $925 billion, according to LendingTree. That’s just below the all-time record of $927 billion, set in 2019 before the pandemic.
But surveys suggest the recent rise in credit card debt has less to do with impulse purchases and more to do with survival. American wages are rising; consumer prices are rising faster. Simply put, things cost more.
“When the costs of groceries, gas and utilities go up, it’s not like you can cancel them like a Spotify subscription,” Schulz said.
In the last three years, according to an analysis by NerdWallet, median income has grown 7 percent, while consumer costs have risen 16 percent.
A december survey by US News & World Report asked consumers to indicate the main reason for their credit card debt. The most common response was “increased costs coupled with insufficient revenue”. A large number of respondents mentioned unexpected expenses, medical emergencies, job loss, and auto repair. Only a tenth of those with credit card debt blamed their balances on frivolous spending.
“The pressure people feel from rising costs at the grocery store or at the gas pump creates this situation where people use more of their income even if they don’t consume more,” said Bruce McClary, vice president. senior of the non-profit organization. National Foundation for Credit Counseling. “The things they normally buy cost more.”
US credit card customers fall into two camps. A large but shrinking group pays off their card balance every month. Card companies call such customers “vagrants,” a term loaded with irony. Customers who don’t have credit card debt don’t make a lot of money for card companies because they don’t spend a lot of money for the privilege of having a credit card.
The other, smaller but growing group, carries credit card debt from month to month. In the US News survey, 15 percent of respondents reported card balances of $10,000 or more.
At current interest rates, a five-figure credit card balance can cripple a family budget.
A household with average credit card debt of $7,486, as measured by NerdWallet, and an average interest rate of 20.4 percent, would need to spend $695 a month to pay off the debt in 12 months, according to a online interest calculator.
What if the family can only pay $200 a month? Then you’ll be paying off the balance for five years. By the time the debt is paid off, assuming a constant interest rate, the family will have spent $4,239 in addition to the $7,486 actually borrowed. And all this assuming that the family never uses the card again.
Credit card rates are rising along with interest rates in general. The Federal Reserve raised interest rates by more than 4 percentage points in 2022, one of the most dramatic money-tightening campaigns in US history, to rein in inflation.
The rate increases pushed mortgage rates to their highest levels in more than a decade, around 7 percent.
Credit card rates vary much more than mortgage rates. Lenders want to make a profit and issue cards to consumers with a wide range of credit scores, with the attendant risk that some customers will default on debt.
As recently as 2016, average card rates were between 13 and 14 percent: high but not like today. At the beginning of 2022, the average credit card had an interest rate of 16 percent. By the end of the year, the average was over 20 percent.
Many card customers—43 percent in a recent survey — I don’t know how much interest they’re paying.
“I have several cards of my own and I couldn’t tell you the rates on any of them,” said Sara Rathner, credit card expert at NerdWallet. “When you pay your bills in full on time every month, it’s not a problem.”
Lenders generally market credit cards less with interest rates and more with “rewards,” offering benefits such as small cash back ratios on certain purchases, air travel credits, or “points” that can be exchanged for any quantity of goods. or services.
“When you look at marketing materials from credit card companies, what do you see? You see the rewards,” said Rodney Sullivan, executive director of the Richard A. Mayo Center for Asset Management at the University of Virginia Darden School of Business. “They are front and center, always.”
Credit card customers also tend to focus more on rewards than rates. In Bankrate’s recent survey, 36 percent of cardholders listed rewards as the best feature on their card. Only 10 percent cited a competitive interest rate.
“You definitely see a lot of people seduced by rewards because they are seductive,” Rathner said. “And a lot of them are aspirational.”
Flight attendants walk the aisles of planes offering applications for cards that could one day net you a free first-class ticket to Rome.
“Humans, by our nature, love rewards,” Sullivan said. “We love receiving benefits.”
Credit card rewards can provide significant benefits to the cardholder who charges a lot and pays off the balance every month. However, if the debt is not paid off, the game quickly turns against the player.
“Those rewards,” Sullivan said, “will not be worth the 20 percent interest you’ll pay.”
Trying to escape the pit of credit card debt? Here are six strategies to consider.