The Federal Reserve Bank of New York reported this month that Americans’ credit card balances increased significantly in the second quarter, reaching over $1 trillion.
According to a blog post from New York Fed researchers, credit cards are the most common form of household debt and experienced the largest growth among all debt types. The researchers found that over two-thirds of Americans had a credit card in the second quarter, up from 59 percent about ten years ago. They also noted that card balances were more than 16 percent higher in the second quarter of this year compared to the same period last year.
Ben Alvarado, executive vice president and director of core banking at California Bank & Trust, stated, “It’s easy to become overwhelmed by credit card debt, and $1 trillion tells us that many Americans are making purchases with money they don’t necessarily have.”
With the rising cost of goods and services, consumers are increasingly relying on credit cards to cover expenses. A recent report from credit bureau TransUnion found that younger adults, in particular, are using credit to manage tighter budgets. “Everybody is using credit a bit more to help make ends meet,” said Michele Raneri, vice president of U.S. research and consulting at TransUnion.
Despite higher prices and rising interest rates, there is currently “little evidence” of widespread financial distress among consumers, according to the Fed researchers. The New York Fed discovered that card delinquencies, which were unusually low during the pandemic, have returned to pre-pandemic levels.
However, increasing balances could create difficulties for certain borrowers, including those set to resume repayment of student loans in October after a three-year break, as noted by the researchers.
Credit counselors at GreenPath Financial Wellness, a national credit counseling agency, have observed concerning trends and are not surprised by the higher reported balances. “We are seeing that play out in real time,” said Jeremy Lark, senior manager of program performance and quality assurance at GreenPath.
A survey from financial services company Empower found that a third of households with student debt expect their monthly loan payments to exceed $1,000. Many are preparing for significant lifestyle and budget changes when repayment begins, which includes cutting back on dining out and potentially taking on more credit card debt.
For borrowers who don’t pay their card bill in full each month, accumulating credit card debt can be expensive. The New York Fed reported that the average interest rate for cards with balances was about 22 percent in May. Additionally, TransUnion data from the second quarter revealed that the average card debt per borrower was nearly $6,000. Making only the minimum monthly payment would take approximately 18 years and entail nearly $9,500 in interest to pay off the debt, according to Ted Rossman, senior industry analyst with Bankrate.
To address potential debt challenges, borrowers with federal student loans can explore income-driven repayment plans, which could lower monthly payments to a more manageable amount. Analyzing spending habits and debts is also recommended to gain a better understanding of one’s financial situation.
There are two common strategies for paying down credit card debt. The first involves prioritizing the card with the highest interest rate to save the most money. The second option focuses on paying off the card with the lowest balance first to build momentum. Whichever approach is chosen, it’s important to allocate extra funds towards the targeted card while making minimum payments on the others. Once one balance is paid off, the additional cash can be directed towards the next card.
After paying off a credit card, leaving the account open and using it minimally can potentially benefit one’s credit score. Unused credit contributes positively to the credit score.
The article also provides answers to several commonly asked questions about credit card debt, including transferring card balances to a new card with a lower rate, consolidating card debt with a personal loan, and using credit cards to repay student loans.