US consumers continue to feel the impact of the current economic climate, leaning again on credit cards—as many did in the early days of the pandemic—to help cover daily expenses like food, gas, and other staples.

The Federal Reserve Bank of New York says credit card debt is rising at its fastest clip in over two decades. It’s rapidly approaching the all-time record set in the fourth quarter of 2019. 

Overall, Americans owe $930 billion on their credit cards, a 15 percent increase from a year ago.

According to a recent report by CreditCards.com, 60 percent of credit-card debtors admit to having been in credit card debt for at least a year, up from 50 percent a year ago. 

Young People, Borrowers with Lower Income Adding Debt

Young people and those in the lowest income brackets are more likely to carry a balance to cover daily expenses such as utilities, groceries, or child care than older generations. 

This can be attributed to their increased wealth compared to younger generations.

Credit utilization (the ratio of how much available credit you’ve used as a percentage of your credit limit) has been rising since early 2021. 

Households with less than $50k in annual income have roughly a 28 percent credit utilization ratio, compared to around 23 percent for households with an income higher than $125k. For them, credit isn’t just about additional debt but also serves as a necessary spending vehicle.

Economists worry that if economic conditions sour, unsecured debt held by subprime borrowers could quickly become unmanageable, especially since these borrowers pay higher interest rates and typically earn less than prime borrowers.

There’s a Significant Increase in New Credit Card Issuance

Despite increasing interest rates and fears that a recession is on the horizon, borrowers are both opening new cards and charging more on the ones they already have. 

Back in August 2022, the Federal Reserve Bank of NY said that in the second quarter, total household debt grew by $312B to a total of $16.15T. 

Credit cards were a big part of that growth: 233 million new credit accounts were opened in that quarter, the largest increase since 2008. Of the new debt accumulated during that quarter, $46 billion was credit card debt.

Credit bureau TransUnion found that 161.6 million people in the US — almost half of the total population — had at least one credit card in the second quarter, an increase from 153.3 million in 2021. In that same time frame, the median debt per borrower jumped from $4,817 to $5,270.

So, what could be causing this credit card craze? When the economy reopened and Americans returned to work, credit-card issuers wooed people to borrow again. Most loosened underwriting standards, making getting cards easier for those with lower credit scores. They also enticed consumers with airline points, cash back, and other incentives.

Delinquency Rates Remain Low Despite Recent Increases

Delinquency rates, especially for borrowers in the highest-income areas, remain well below historical trends.

Why It’s ‘Harder Than Ever’ to Eliminate Credit Card Debt

Decades-high inflation has taken a toll on the precarious finances of many American households. Many are firing up their credit cards to get by as inflation, which has far overtaken wage growth, saps their buying power.

About a quarter of respondents in the Creditcards.com poll cite day-to-day expenses as the primary reason they carry a balance. 

Necessities have gone up in cost much faster than average earnings. If the same goods they’ve always been consuming suddenly are more expensive, consumers may turn to credit to help with the short-term funding of those purchases.

Almost half of the 1,824 cardholders surveyed attributed their balance to an emergency expense, including a car/home repair, job loss, or medical bill. 

Rising interest rates are certainly not helping credit card holders. It makes borrowing more expensive.

According to Bankrate, the average annual percentage rate (APR) on new credit cards, at 19.14 percent, is at its highest level in three decades and will probably continue rising.

So, What’s the Best Way to Break the Credit Card Cycle?

By taking on more debt, what you’re doing is borrowing future income. 

If you’re one of the many Americans having difficulty eliminating credit card debt, there’s no time like today to start chipping away.

Here’s how you can do it:

• Build an emergency fund

Financial experts say it’s vital to have an emergency fund.

Having a little bit of extra savings in a separate savings account means you won’t have to pull out your credit card the next time you have to take the dog to the vet or have a flat tire.

• Pay cards in full every month

If you are taking out multiple credit cards, it’s vital that you keep a close eye on your outstanding balance and pay them off in full every month.

• Use a balance transfer card

Opening a new credit card may be last on your priorities if you’re looking to get out of credit card debt.

However, you can pay down high-interest debt with a 0 percent balance transfer card. Doing this can save you a significant amount on interest fees and direct all payments you make toward your principal balance. Some cards offer no interest for up to 21 months.

Before you complete a balance transfer, ensure you have a repayment plan in place so you pay off debt before the introductory  0 percent APR period ends. Otherwise, you will wind up paying interest again on lingering balances.

• Borrow money from friends or family

You may run into trouble qualifying for a balance transfer credit card if your credit score is less-than-stellar (below 580). 

An alternative is asking a close friend or family member for a loan.

This option may make sense if you have willing family or friends and your debt isn’t too high. 

Just ensure you set up a repayment plan before borrowing any money and stick to it so you do not risk destroying your relationship.

What’s Next? 

With inflation exceeding wage gains, more households now rely on revolving debt.

The Federal Reserve is likely to raise interest rates if inflation doesn’t show clear signs of a pullback. Since most credit cards have variable rates, the rates are typically directly tied to the Fed Funds rate.

As the federal funds rate rises, the prime rate also rises, and credit card rates follow suit. 

As a cardholder, you’ll typically see the impact within a billing cycle or two.

This increase, along with a weakening economy, may lead to higher delinquencies.

If you’re overwhelmed with credit card debt, American Consumer Solutions™ can help!

Continue reading on how to pay off or reduce holiday debt.