Americans’ credit card balances rose quickly in the second quarter, reaching a significant milestone of over $1 trillion, according to a report by the Federal Reserve Bank of New York.
Credit cards are the most common type of household debt, with the largest increase among all types of debt. The researchers at the New York Fed found that more than two-thirds of Americans had a credit card in the second quarter, up from 59 percent about ten years ago. Additionally, 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, commented, “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.”
As the prices of goods and services continue to rise, consumers are increasingly relying on credit cards to cover their expenses. A recent report from credit bureau TransUnion revealed that younger adults, in particular, are using credit to manage tighter budgets. Michele Raneri, vice president of U.S. research and consulting at TransUnion, stated, “Everybody is using credit a bit more to help make ends meet.”
Despite the higher prices and rising interest rates due to the Federal Reserve’s efforts to control inflation, there is currently “little evidence” of widespread financial distress among consumers, as they have remained resilient, according to the Fed researchers. The New York Fed’s findings indicate that card delinquencies, which were unusually low during the pandemic, have now returned to pre-pandemic levels.
However, increasing credit card balances could pose challenges for some borrowers, including those who are set to resume repaying their student loans in October after a three-year break, noted the researchers.
Credit counselors are already seeing concerning trends and are not surprised by the higher reported balances. Jeremy Lark, senior manager of program performance and quality assurance at credit counseling agency GreenPath Financial Wellness, stated, “We are seeing that play out in real time.” GreenPath reported that among the clients they counseled in July who had card debt on their credit report, the median card balance was $7,717, compared to $4,298 in July 2022.
The agency also reported a 50 percent increase in inquiries from people citing student loans as a reason for seeking help in July compared to June. They expect an additional increase in September as loan services start notifying borrowers of their repayment obligations.
According to a recent survey by financial services company Empower, a third of households with student debt anticipate monthly loan payments of at least $1,000. Many are preparing for significant lifestyle and budget changes as repayment begins, including cutting back on dining out and potentially taking on more credit card debt.
This could be particularly costly for individuals who cannot pay off their credit card bill in full each month. The Federal Reserve Bank of New York reported that the average interest rate on cards with balances was around 22 percent in May. TransUnion’s second-quarter data showed that the average card debt per borrower was almost $6,000. Senior industry analyst with Bankrate, Ted Rossman, explained that making only the minimum monthly payment would take roughly 18 years and accrue nearly $9,500 in interest to pay off the debt.
What steps can consumers take if they are concerned about a potential debt crisis? Borrowers with federal student loans can explore income-driven repayment plans to lower their monthly payments to a more manageable amount. It is important to understand the various plan options and their qualifications. Additionally, Ben Alvarado recommended reviewing spending habits and debts, including noting the number of credit cards, their balances, and the interest rates being paid.
There are two popular strategies for paying down credit card debt. Financial planners typically suggest paying off the card with the highest interest rate first to save the most money. Alternatively, some prefer to pay down the card with the lowest balance first for a quick sense of accomplishment. In both cases, allocating any extra money towards the targeted card while making minimum payments on the others is essential to avoid late fees and damage to credit. After paying off one balance, the extra cash can be directed towards the next card, and so on.
Once a credit card is paid off, it can be beneficial for credit scores to keep the account open while utilizing it minimally. The more available credit a person has, the better the impact on their credit score.
Here are some common questions about credit card debt:
Can I transfer my card balance to a new card with a lower rate?
According to Bankrate’s Ted Rossman, balance-transfer offers with zero percent interest are still available, typically for individuals with FICO credit scores of 670 or higher. However, it is important to ensure that the transferred balance can be paid off within the allotted time (usually 15 to 18 months). Transferring a balance to a new card usually incurs a fee of 3 to 5 percent of the transferred balance.
Should I consider consolidating my card debt with a personal loan?
More borrowers are turning to personal loans from online, “fintech” lenders, as well as banks and credit unions, to pay off high-interest credit cards. However, the benefits of consolidation may be short-term unless card spending is curbed after consolidation, according to separate data from TransUnion. While personal loans have fixed monthly payments like credit cards, they are considered “unsecured” loans, meaning there is no collateral involved. TransUnion’s findings based on data from April 2021 to September 2022 indicate that borrowers who used personal loans to consolidate card debt initially saw a 57 percent decrease in their card balances. However, 18 months later, the card balances had risen close to their previous levels.
Can I use credit cards to repay my student loans?
In general, using credit cards to pay off student loans is not advisable. According to financial aid expert Mark Kantrowitz, both federal and private student loan lenders do not allow it, primarily due to the fees charged by card issuers and the delay in receiving the funds. Kantrowitz also emphasized that credit cards typically have much higher interest rates compared to student loans.
