A growing number of Americans are facing potentially devastating credit card debt
Americans are piling up credit card debt just as interest rates are reaching historic highs.
Numerous surveys show that American consumers are sinking deeper into credit card debt. A new survey by Bankrate, a consumer finance company, found that 46% of cardholders balances on credit cards from month to month, up from 39 percent a year ago.
A survey conducted by NerdWallet, a personal finance company, found that the average family in the US with credit card debt of $7,486., which is 29 percent more than a year earlier. A third survey by personal finance website GOBankingRates found that 14 million Americans owe over $10,000 in credit card debt.
Card balances are rising at a time when it may be harder than ever for consumers to pay them off. Credit card interest rates score 20 percent at the end of 2022, according to the Federal Reserve, this is 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 Schultz, chief credit analyst at LendingTree, a consumer finance company. “We always have credit card debt and it almost always goes up.”
Collective of the nation credit card balance according to LendingTree, is $925 billion. This is just below the historical record of $927 billion set before the pandemic in 2019.
But surveys show that the recent rise in credit card debt has less to do with impulsive buying than with survival. American wages are rising; consumer prices are rising faster. In other words, things cost more.
“When food, gas and utility bills go up, you can’t cancel them like a Spotify subscription,” Schultz said.
According to NerdWallet analysis, median revenue has grown by 7% over the past three years, while consumer spending has grown by 16%.
AND December Poll US News & World Report asked consumers to name the root cause of their credit card debt. The most common response was “increased spending coupled with insufficient income”. A large number of respondents mentioned unexpected expenses, medical emergencies, job loss and car repairs. Only one tenth of those with credit card debt blame their balance sheets on unreasonable spending.
“The pressure people are under because of rising prices at the grocery store or at the gas station creates a situation where people use more of their income even if they don’t consume more,” said Bruce McClary, senior vice president of the nonprofit. National Credit Counseling Foundation. “The things they usually buy cost more.”
American credit card customers fall into two camps. One group, large but shrinking, replenishes the card balance every month. Card companies refer to such customers as “slackers,” a term filled 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 on the privilege of carrying a credit card.
Another group, smaller but growing, is in credit card debt month after month. In a 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 could wreak havoc on a family’s budget.
According to NerdWallet, a household with an average credit card debt of $7,486 and an average interest rate of 20.4 percent would have to spend $695 per month to pay off the debt in 12 months. online percentage calculator.
What if the family could only afford $200 a month? It will then repay the balance within five years. By the time the debt is repaid, assuming a constant interest rate, the family will have spent $4,239 on top of the $7,486 it actually borrowed. And all this on the condition that the family will never use 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 in one of the most dramatic money-reduction campaigns in U.S. history to bring down inflation.
Rising rates have sent mortgage rates to their highest level in more than a decade, around 7 percent.
Credit card rates are much higher than mortgage rates. Lenders want to make a profit, and they issue cards to consumers with a wide range of credit scores, with the attendant risk that some customers will default.
Back in 2016, average card rates ranged from 13 to 14 percent: a lot, but not in the same way as today. At the start of 2022, the average credit card interest rate was 16 percent. By the end of the year, the average was over 20 percent.
Many card customers – 43 percent in one recent poll I don’t know how much interest they pay.
“I have several of my own cards and I can’t tell you the rates on any of them,” said Sarah Ratner, credit card expert at NerdWallet. “When you pay your bills in full and on time every month, it’s not a problem.”
Lenders tend to sell credit cards not so much for interest rates as for “rewards”, offering perks such as small fractions of cash returned to the consumer on certain purchases, air travel credits, or “points” that can be redeemed for any number of goods. or services.
“When you look at a credit card company’s marketing materials, what do you see? You see the reward,” said Rodney Sullivan, executive director of the Richard A. Mayo Asset Management Center at the University of Virginia’s Darden School of Business. “They are always in the spotlight.”
Credit card customers also tend to focus more on rewards than rates. In a recent survey by Bankrate, 36% of cardholders named bonuses as the best feature of their card. Only 10 percent indicated a competitive interest rate.
“You definitely see a lot of people getting tempted by awards because they’re tempting,” Ratner said. “And many of them are desirable.”
Flight attendants roam the aisles of planes and offer bids for cards that could one day grant a free first-class ticket to Rome.
“People naturally love rewards,” Sullivan said. “We love to benefit.”
Credit card rewards can be a significant benefit to a cardholder who makes a lot of debits and pays off the balance monthly. However, if you do not pay off the debt, the game will quickly turn against the player.
Six ways to get out of credit card debt
“These rewards,” Sullivan said, “will not be worth the 20 percent you’ll be paying.”
Struggling to get out of the pit of credit card debt? Here are six strategies to consider.
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