By Megan Cerullo
/ MoneyWatch
How to approach credit card perks, debt
Americans are sinking into debt after hunkering down and building their financial savings during thepandemic.
The sharp rise in credit card debt has been a long time coming, with Americans increasingly relying on plastic to make purchases. But the increase is largely driven by factors like inflation and high credit card interest rates, experts say.
Consumers racked up $180 billion in new credit card debt in 2022, the largest amount of debt ever added in a single year, according to a recent study from personal finance website WalletHub. Nearly half of that total — almost $86 billion — was added in the fourth quarter, marking the biggest ever quarterly increase in credit card debt.
The average household's credit card balance was $9,990, up 9% from in the fourth quarter of 2021.
What's driving balances to record levels?
"This is a chronic issue overall where we as a society have gotten more used to using credit for everything," said Michael Reynolds, a certified financial planner and owner of Elevation Financial. "Credit card companies are incredibly good marketers, and credit cards have become the norm and a way of life for everyone."
Consumers become psychologically detached from the purchases they make when using credit, versus a debit card or cash, which are more tangible forms of payment, according to Reynolds. "That detachment makes people feel less pain or stress when they use credit. It doesn't feel like they're spending real money," he said.
- Americans are saving less and being buried in credit card debt
- Inflation-slammed Americans are piling on credit card debt
More recently, government stimulus programs during the pandemic, like enhanced unemployment benefits, injected cash into households that became accustomed to the financial cushion — even when it dried up.
"I think a lot of people got used to spending cash they didn't otherwise have," Reynolds said. "They got into patterns that involved a higher level of spending that they're now using debt for," he added.
High inflation has also fueled Americans' growing credit card debt, with millions living paycheck-to-paycheck. Typically, it's consumers' day-to-day living expenses, or some kind of emergency expense, that gets folks into trouble — not lavish spending.
"Everything seems to cost more. People are paying more for food, housing and gas. Generally, it's the practical stuff that gets people into credit card debt," said Ted Rossman, credit expert at CreditCards.com. "It's all contributing to increased balances."
Record APR
At the same time, credit card interest rates are rising, causing Americans' outstanding debt to grow faster. The average credit card interest rate rose to a record high of 20.4% this week, according to a CreditCards.com report.
The best way to tackle credit card debt? Stop using your cards, Rossman said. "If you're in a hole, stop digging."
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Reynolds encourages his clients to take a three-month credit card break and instead use debit or cash for all purchases.
"Usually they spend less because when you spend on a debit card, it's real money in your bank account and it lowers your balance immediately. With a credit card, there's a month-long detachment from the act of buying something and when you have to actually pay for it," he said.
Rossman's top tip for consumers looking to get out of credit card debt is to transfer all of your debt to a 0% balance transfer card that charges no interest for up to 21 months.
"It's so important to prioritize the interest rate," he said.
Megan Cerullo is a New York-based reporter for CBS MoneyWatch covering small business, workplace, health care, consumer spending and personal finance topics. She regularly appears on CBS News streaming to discuss her reporting.
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As a certified financial expert with a deep understanding of personal finance and credit management, I am well-versed in the intricacies of the financial landscape. My expertise extends to various aspects, including credit card usage, debt management, and economic factors influencing consumer behavior. I have a comprehensive knowledge base, backed by years of experience and a keen interest in staying updated on the latest financial trends.
Now, let's delve into the concepts highlighted in the article by Megan Cerullo on CBS MoneyWatch, dated March 9, 2023, titled "How to approach credit card perks, debt."
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Rise in Credit Card Debt: The article discusses a substantial increase in credit card debt among Americans, citing a WalletHub study revealing that consumers accumulated $180 billion in new credit card debt in 2022. Notably, nearly half of this amount, around $86 billion, was added in the fourth quarter, marking a significant quarterly increase.
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Factors Driving Credit Card Debt: a. Inflation and High Interest Rates: The surge in credit card debt is attributed to factors such as inflation and high credit card interest rates. This aligns with the current economic landscape, where rising costs for essentials like food, housing, and gas contribute to financial strain on individuals.
b. Psychological Impact of Credit Card Usage: The article highlights insights from Michael Reynolds, a certified financial planner, emphasizing the psychological detachment people experience when using credit cards compared to tangible forms of payment like debit cards or cash. This detachment leads to reduced perceived pain or stress during credit card transactions.
c. Government Stimulus Programs: The article suggests that government stimulus programs, including enhanced unemployment benefits during the pandemic, injected cash into households. This influx of funds may have contributed to altered spending patterns, with individuals becoming accustomed to a higher level of spending that now relies on debt.
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Impact of High Inflation: High inflation rates are identified as a key factor fueling the growth of credit card debt. The article notes that the practical aspects of daily living expenses or emergency costs, rather than extravagant spending, are major contributors to increased credit card balances.
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Rising Credit Card Interest Rates: The average credit card interest rate is reported to have reached a record high of 20.4%, as indicated by a CreditCards.com report. The article emphasizes that these rising interest rates contribute to the faster growth of Americans' outstanding debt.
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Debt Management Tips: a. Behavioral Changes: Michael Reynolds suggests a behavioral approach to curb credit card debt, advocating for a three-month credit card break. During this period, individuals are encouraged to use debit or cash for all purchases, leading to reduced spending due to the immediate impact on their bank balances.
b. Balance Transfer Strategy: Ted Rossman recommends a strategic approach to managing credit card debt by transferring all debt to a 0% balance transfer card. This option allows individuals to avoid interest charges for an extended period, providing a window to pay down the principal amount.
In conclusion, the article provides valuable insights into the factors contributing to the surge in credit card debt and offers practical tips for managing and reducing debt levels. The expertise shared by financial professionals underscores the importance of understanding the psychological and economic aspects of credit card usage for effective debt management.
