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Credit Card Debt Reaches Record High

Americans’ credit card balances rose significantly in the second quarter, reaching a staggering milestone of over $1 trillion, according to the Federal Reserve Bank of New York.

Credit cards are the most common form of household debt and experienced the largest increase among all types of debt. The researchers at the New York Fed found that over two-thirds of Americans had a credit card in the second quarter, up from 59 percent around ten years ago. Additionally, card balances were more than 16 percent higher 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.”

Consumers are increasingly relying on credit cards to cover rising costs of goods and services. A recent report from credit bureau TransUnion revealed that younger adults, in particular, are turning to 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 higher prices and increasing interest rates caused by the Federal Reserve’s efforts to control inflation, there is currently “little evidence” of widespread financial distress among consumers, according to the Fed researchers. The New York Fed found that card delinquencies, which were unusually low during the pandemic, have returned to pre-pandemic levels.

However, rising balances may put some borrowers under strain, especially those scheduled to start repaying student loans in October after a three-year break, as noted by the researchers.

Credit counselors are observing concerning trends and are not surprised by the higher reported balances. Jeremy Lark, senior manager of program performance and quality assurance at GreenPath Financial Wellness, a national credit counseling agency, stated, “We are seeing that play out in real time.” GreenPath reported that the median card balance for their clients with card debt on their credit report increased from $4,298 in July 2022 to $7,717 in July 2023.

Inquiries from individuals citing student loans as a reason for seeking counseling from GreenPath increased by 50 percent in July compared to June. The agency expects this number to further rise in September as loan services begin notifying borrowers of their repayment obligations.

A recent survey by financial services company Empower revealed that a third of households with student debt anticipate monthly loan payments of at least $1,000. Many of these households are preparing for significant lifestyle and budget changes when repayment begins, including cutting back on dining out and taking on more credit card debt.

For individuals who do not pay their credit card bill in full each month, this situation could become expensive. The average interest rate for cards with balances was about 22 percent in May, according to the New York Fed. Data from TransUnion for the second quarter showed an average card debt of nearly $6,000 per borrower. Making only the minimum monthly payment, it would take a borrower approximately 18 years and cost nearly $9,500 in interest to pay off the debt, warned Ted Rossman, senior industry analyst with Bankrate.

What can consumers do if they are concerned about a potential debt crisis? Borrowers with federal student loans may qualify for income-driven repayment plans, which can lower monthly payments to a more manageable amount. It is recommended to review spending habits and debts thoroughly. Ben Alvarado suggested tallying up the number of cards one has, noting their balances, and the interest rates being paid.

There are two popular strategies for paying down credit card debt. The first involves paying off the card with the highest interest rate first to save the most money. The second option is to pay down the card with the lowest balance first to build momentum. Whichever approach one prefers, it is important to allocate any additional funds towards the targeted card while making minimum payments on the others to avoid late fees and negative impacts on credit. Once one balance is paid, the extra cash should be directed towards the next card, and so on.

After paying off a credit card, it can be beneficial to leave the account open and minimally use it to improve one’s credit score. The more unused credit available, the better the effect on the credit score.

Here are some common questions about credit card debt:

Balance-transfer offers with zero percent interest are still available, according to Ted Rossman from Bankrate. Generally, individuals with FICO credit scores of 670 or higher qualify for these offers. However, it is crucial to ensure that the transferred balance can be paid off within the given time frame, typically 15 to 18 months. There is usually a fee of 3 to 5 percent of the balance transferred to the new card.

Many borrowers are turning to personal loans as a way to pay off high-interest credit cards. Personal loans are available from online or “fintech” lenders, as well as banks and credit unions. However, the benefits may be short-term unless card spending is controlled after consolidation, warns TransUnion. Based on data from April 2021 to September 2022, individuals who used personal loans to consolidate card debt experienced a 57 percent decrease in card balances on average. However, 18 months later, the card balances rose close to their previous levels.

In general, this is not recommended. Financial aid expert Mark Kantrowitz explains that neither the federal government nor private student loan lenders allow credit card payments for student loans. Credit cards typically have much higher interest rates compared to student loans, making it an unfavorable option.

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