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With day-to-day expenses staying high due to inflation, more Americans are relying on credit cards to make ends meet.
As the personal savings rate sank near an all-time low, credit card balances jumped 15% year over year, according to the latest quarterly report from the Federal Reserve Bank of New York, notching the largest increase in more than 20 years.
"With prices more than 8% higher than they were a year ago, it is perhaps unsurprising that balances are increasing," the Fed researcherswrote in a blog post.
"The real test, of course, will be to follow whether these borrowers will be able to continue to make the payments on their credit cards."
Now studies show fewer Americans are paying off their credit cards off in full.
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Nearly half, or 46%, of credit cardholders carry debt from month to month on at least one card, up from 39% last year, according to a new report by Bankrate.com.
"People are hanging in there for now, but some of the cracks are starting to show," said Ted Rossman, senior industry analyst at Bankrate.
Not only can carrying a balance lower your credit score, but sky-high annual percentage rates also make credit cards one of the most expensive ways to borrow money.
The average credit card rate is now 19.6%, on average — atan all-time high— after rising at the steepest annual pace ever, in step with theFederal Reserve'sinterest ratehikes to combat inflation.
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Along with the Fed's commitment to keep raising its benchmark until more progress is made, credit card rates will be over 20% by the end of the year, Rossman predicts.
Those with revolving debt tend to have even higher rates, he said.However, of those who carry a balance, 43% don't even know the interest rate they're being charged, Bankratealso found.
The math is 'staggering'
At 19.6%, if you made minimum payments toward the average credit card balance — which is $5,474, according to Transunion— it would take you almost 17 years to pay off the debt and cost you more than $7,528 in interest, Bankrate calculated.
"The math is pretty staggering," Rossman said.
The first thing you should do is acknowledge what you owe and the interest rate, he advised. Then, start to pay down the debt with a0% balance transfer card.
A0% balance transfer card is "the best weapon that you can have in your arsenal against credit card debt," said Matt Schulz,LendingTree'schief credit analyst.
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"If you don't take steps to knock that debt down, it will only get more expensive," Schulz said.
Cards offering up to 21 months with no interest on transferred balances "are still widely available," he added.
Making the best use of a balance transfer boils down to making those payments on time and aggressively paying down the balance during the introductory period, according to Schulz.
If you don't pay the balance off, the remaining balance will have a higher APR applied to it, which is generally about 23%, on average, in line with the rates for new credit.
Certainly! The article delves into the concerning rise in credit card usage and the implications of increasing debt among Americans. Let's break down the key concepts and details mentioned in the article:
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Inflation and Expenses: It discusses how day-to-day expenses are rising due to inflation, leading individuals to rely more on credit cards to manage their finances.
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Credit Card Balances: According to the Federal Reserve Bank of New York's report, credit card balances have surged by 15% year over year, marking the largest increase in over two decades. The reduced personal savings rate adds to this concerning trend.
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Debt Trends: Fewer Americans are paying off their credit card balances in full, with nearly half of credit cardholders (46%) carrying debt from month to month, up from 39% in the previous year.
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Interest Rates and Costs: The average credit card rate has reached an all-time high of 19.6%. Carrying a balance not only affects credit scores but also leads to substantial interest costs. For instance, making minimum payments on an average balance could take almost 17 years to pay off, incurring over $7,500 in interest.
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Financial Strategies: Financial experts recommend strategies to manage credit card debt, such as being aware of owed amounts and interest rates. They also suggest using 0% balance transfer cards as a tool to mitigate high-interest debt.
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Balance Transfer Cards: These cards offer an interest-free period, usually up to 21 months, for transferred balances. However, it's crucial to make timely payments and aggressively reduce the balance during this introductory period to avoid accruing higher APR afterward.
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Financial Literacy: Highlighted the importance of financial literacy, emphasizing that without proactive steps to reduce debt, it becomes increasingly costly over time.
The piece reflects the concerning trend of rising credit card debt among Americans, driven by inflation and a lack of financial preparedness. It stresses the significance of informed financial strategies and responsible borrowing to mitigate the long-term consequences of high-interest debt.
