Americans’ credit card balances rose sharply in the second quarter, reaching an impressive milestone of more than $1 trillion, the Federal Reserve Bank of New York reported this month.
Credit cards are the most common type of household debt, New York Fed researchers wrote in a blog post, and saw the largest increase in all types of debt. More than two-thirds of Americans had a credit card in the second quarter, up from 59 percent about a decade earlier, the researchers found. And, they noted, card balances were more than 16 percent higher in the second quarter of this year compared to a year earlier.
“It’s easy to get overwhelmed by credit card debt, and $1 trillion tells us that many Americans are buying with money they don’t need,” said Ben Alvarado, executive vice president and director of core banking at California Bank & Trust.
With the increase in prices of goods and services, consumers are increasingly using credit cards to pay for expenses. Younger adults, in particular, are turning to credit to deal with tighter budgets, according to a recent report from credit bureau TransUnion. “Everyone is using credit a little bit to help make ends meet,” said Michele Raneri, vice president of US research and consulting at TransUnion.
However, despite higher prices and rising interest rates (as a result of the Federal Reserve’s battle to tame inflation), there is “little evidence” so far of widespread financial distress among consumers, who have remained stable, Fed researchers said. The New York Fed found that card delinquencies, which were unusually low during the pandemic, have returned to prepandemic levels.
But the increase in balances could make it harder for some borrowers, including those set to start paying off student loans in October after a three-year hiatus, the researchers noted.
Credit counselors, who advise strapped borrowers on managing their debt, say they are noticing worrying trends and that the higher reported balances are not surprising. “We see that play out in real time,” says Jeremy Lark, senior manager of program performance and quality assurance at GreenPath Financial Wellness, a national credit counseling agency in Farmington Hills, Mich. Of clients advised by GreenPath in July who had card debt on their credit report, the agency said, the median card balance was $7,717, up from $4,298 in July 2022.
Inquiries from people citing student loans as the reason they called GreenPath increased 50 percent in July from June, the agency reported, adding that a further increase is expected in September as the services of loan begins to inform borrowers of their payment obligations.
A recent survey of financial services company Empower found that a third of households with student loan debt expect their monthly loan payments to be at least $1,000, and many are preparing for “meaningful” lifestyles and budget change when payment begins. Those planned adjustments include cutting back on eating out, as well as taking on more credit card debt.
That can be expensive, especially for people who don’t pay their card bill in full each month. The average interest rate charged on cards with balances is approx 22 percent in May, the New York Fed reported, while second-quarter data from credit bureau TransUnion found that the average card debt per borrower was nearly $6,000. Just making the minimum monthly payment, it would take a borrower about 18 years and pay about $9,500 in interest to pay off the loan, said Ted Rossman, senior industry analyst at Bankrate.
What can consumers do if they are worried about a debt crisis? Borrowers with federal student loans should see if they qualify for income-based repayment plans, which can lower monthly payments to a more affordable amount. There are several plans, with somewhat confusing criteria. Here’s a guide to those plans, including details of the latest, known as SAVE.
Reviewing your spending habits and debts is a good idea, says Mr. Alvarado. He recommends keeping track of how many cards you have and noting both their balances and the interest rate you’re paying.
There are two popular strategies for paying off credit card debt. The first, often favored by financial planners, involves paying off the card with the highest interest rate first, to save the most money. (Check your card agreement or statement to see what rate you’re paying.) In the second option, you pay off the card with the lowest balance first, to quickly build up success. Whichever approach you prefer, funnel any extra money toward the targeted card and make minimum payments on others, so you don’t run into late fees or hurt your credit. Once a balance is paid off, put the extra money on the next card, and so on.
After you pay off a credit card, it can help your credit score to leave the account open while using it less. The more unused credit you have, the better the impact on your credit score.
Here are some questions and answers about credit card debt:
Can I transfer my card balance to a new card with a lower rate?
Balance-transfer offers at zero percent interest are still available, Bankrate’s Mr. Rossman said, and people with a FICO credit score of 670 or higher usually qualify. (The usual FICO score from 2021 to 716.) But before you open a new card, he said, make sure you can pay off the transferred balance in the allotted time — usually 15 to 18 months. You’ll typically pay a fee of 3 to 5 percent of the balance transferred to the new card.
Should I consider consolidating my card debt with a personal loan?
More borrowers are using personal loans, available from online or “fintech” lenders as well as banks and credit unions, as a way to pay off high-interest credit cards. But the benefits may be short-lived unless borrowers hold back spending on the card after consolidating, according to separate data from TransUnion. Personal loans, like credit cards, are “unsecured” — no collateral is at stake, like a car or home loan — but have fixed monthly payments. People who used personal loans to consolidate card debt saw a 57 percent drop in their card balances, on average. But 18 months later, card balances have risen close to their previous levels, TransUnion found, based on data from April 2021 to September 2022.
Can I use credit cards to pay off my student loans?
Generally speaking, no, says financial aid expert Mark Kantrowitz. Neither the federal government nor private student loan lenders allow this, he said, because card issuers charge them fees, and there is a delay in receiving the funds. It’s still a bad idea, he says. For one thing, credit cards typically charge higher interest rates than student loans.