Economy

Americans are piling up credit card debt — and it could prove very costly

10:31am January 11, 2023

by Scott Horsley

This illustration picture shows debit and credit cards arranged on a desk on April 6, 2020 in Arlington, Va. Americans are using their credit cards more to pay for everyday expenses at a time when interest rates are rising.

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More Americans are leaning on their credit cards in the face of rising prices. And as interest rates continue to climb, that debt is getting a lot more expensive.

The average credit card user was carrying a balance of $5,474 last fall, according to TransUnion, up 13% from 2021.

That marks a reversal from the first year of the pandemic, when many Americans were able to pay down credit card debt, thanks to generous government relief payments and limited spending on travel and entertainment.

As credit card balances balloon again, they can cast a long shadow over family finances.

Here's what to know about rising credit card debt – and what you can do about it.

It's the everyday stuff that people are charging

With inflation outpacing incomes, more people are relying on credit cards to cover everyday expenses.

"Contrary to popular opinion, it's not usually a vacation or shopping spree," says senior industry analyst Ted Rossman of Bankrate. "It's usually something pretty practical that gets you into credit card debt. But unfortunately, it's easy to get in and hard to get out."

Mel Murphy's rent gobbled up two-thirds of her income as a part-time custodian in Spokane, Wash. That left little wiggle room when unexpected expenses popped up.

"Every time my minivan all of a sudden needed $300 worth of work, or I had an elderly cat, and every time he needed emergency surgery, it went on the credit card," Murphy says.

Fewer people are paying off their balances every month

The share of credit card users who carry a balance has increased to 46% from 39% a year ago, according to Bankrate.

"Almost half of card holders are carrying debt from month to month," Rossman says. "And that debt is as expensive as ever."

Lower-income cardholders are more likely to carry a balance. But even among people making $100,000 a year or more, 37% don't pay the their credit card bill in full every month.

Carrying over card balances is expensive

The average interest rate on credit card debt has soared to nearly 20%, from just over 16% at the beginning of last year. That's the largest one-year increase in the four decades Bankrate has been tracking rates.

The Federal Reserve has been aggressively raising interest rates in an effort to curb inflation. Each time the central bank raises rates, the cost of carrying a balance on your credit card goes up as well.

But when Bankrate did a survey last month, they found more than 4 out of ten credit card holders don't even know what their interest rate is.

"You don't notice it so much on the monthly statement," Rossman says. "Your minimum payment might change by only a few bucks a month. But the problem is, when you drag it out for a decade and a half plus, that's where you really feel it."

There are ways to cut your cost of credit

Of course, the best thing to do if you find yourself with a large credit card debt is to pay it off as quickly as possible. But if you must carry a debt, there are ways to save.

Some card issuers offer zero percent interest on balance transfers, but only for a limited time. Alternatively, it might make sense to take out a low-interest personal loan or consult with a non-profit credit counselor about steps to reduce your interest expense.

Don't chase credit card rewards if you're carrying debt

Instead of searching for a card with the lowest interest rate, many people prioritize rewards, like cash back. But if you're carrying a balance, that can be a mistake.

"If you have debt, I would say forget about rewards entirely. Because it doesn't make sense to pay 20% interest to get 1 or 2 or even 5% back or airline miles," Rossman says. "You've got to put that interest rate first and then worry about rewards later on, once you've paid it off."

Transcript

DWANE BROWN, HOST:

The cost of living is climbing fast, and a growing number of Americans are leaning on credit cards to make ends meet. The average cardholder carries more than $5,000 in credit card debt. And as interest rates keep climbing, that debt is casting a longer shadow over many families' finances. NPR's Scott Horsley is with us now. Good morning, Scott.

SCOTT HORSLEY, BYLINE: Good morning.

BROWN: Hey, not so long ago, I remember we learned that a lot of folks were actually paying down their credit card balances. What happened? What turned it around?

HORSLEY: You're right. We actually saw a pretty steep drop in credit card debt early in the pandemic, back when people couldn't spend much money going out or traveling and when the federal government was putting those big relief payments into people's bank accounts. But that has turned around, and credit card debt is now climbing again to near record levels. Some of that, of course, is being driven by inflation. Mel Murphy in Spokane probably speaks for a lot of people. She was working last year as a part-time custodian, and her rent was gobbling up about two-thirds of her paycheck, so there just wasn't a lot left over for any unexpected expense.

MEL MURPHY: So every time my minivan all of the sudden needed $300 worth of work, or I had an elderly pet cat, and every time he needed emergency surgery at the vet, it went on the credit cards.

HORSLEY: Now, Murphy's been trying hard to pay down her credit card debt, but a survey out this week from Bankrate finds that a growing number of card users - nearly half - are now carrying debt over from month to month. And that debt is getting more and more expensive.

BROWN: That's a real reality check. How much, Scott, do these interest rates from the Fed actually play into that part?

MURPHY: Yeah, the interest rate on credit cards usually tracks pretty closely with what the Federal Reserve does. And, as we know, the Fed has been raising rates aggressively over the last year as it tries to crack down on inflation. Every time the Fed boosts its benchmark rate by half a point or three-quarters of a point, credit card rates ratchet up as well. And if you carry a balance for a while, that higher interest rate can add hundreds or even thousands of dollars in additional interest costs. Although Bankrate's Ted Rossman says you might not know that just from looking at your monthly credit card bill.

TED ROSSMAN: Your minimum payment might only change by a few bucks a month. But the problem is when you drag it out. That's where you really feel it.

HORSLEY: The average interest rate on credit cards is now nearly 20%. That's up from just over 16% at the beginning of last year. And when Bankrate did a survey last month, they found more than 4 in 10 credit card holders don't even know what their interest rate is.

BROWN: So, Scott, what's the best advice here for cardholders, like you and me and those listening, to cut costs?

HORSLEY: Well, of course, the best thing to do if you're carrying credit card debt is pay it off as quickly as you can. But if you have to carry a debt, Rossman says you should definitely try to minimize the interest expense, maybe transfer your balance to a zero-interest card if you can, or possibly a lower-cost personal loan. And Rossman says don't be swayed by cashback offers on pricey credit cards if you're carrying a balance.

ROSSMAN: Because it doesn't make sense to pay 20% interest just to get one or two or even 5% in cash back or airline miles. I really think if you have debt - no shame; a lot of people do - but you've got to put that interest rate first and then worry about rewards later on once you've paid it off.

HORSLEY: Now, the good news is credit card delinquency rates are still pretty low, but they are expected to climb. And that's just another measure of the hardship that many people are feeling right now from the one-two punch of rising prices and rising interest rates.

BROWN: All right, NPR's Scott Horsley. Thanks, Scott.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

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