Americans are piling on the debt burden even as interest rates have reached historic highs.
Many studies show American consumers are sinking into debt. A new study from Bankrate, the financial services firm, found that 46 percent of cardholders carry credit card balances from month to month, up from 39 percent last year.
A study by NerdWallet, the personal finance company, found that the average US household Debt is $7,486, a 29-percent increase from the previous year. A third poll, from personal finance website GOBankingRates, found that 14 million Americans are in debt more than $10,000 in debt.
Card balances increase at a time when customers may find it difficult to make down payments. Credit card interest earn 20 percent at the end of 2022, according to the Federal Reserve, the highest level in nearly 30 years of research.
Buying now and paying later is a common consumer desire.
“Americans love their credit cards,” said Matt Schulz, chief credit analyst at LendingTree, the financial services company. “We always have credit card debt, and it’s almost always going up.”
National assembly credit card balance that’s $925 billion, according to LendingTree. It is below the historical record of $927 billion, set in the 2019 pandemic.
But research suggests that the recent rise in credit card debt is less about shopping and more about living. American wages are rising; consumer prices are rising rapidly. Simply put, things cost more.
“When the price of food and gas and utilities goes up, it’s not like you can cancel like a Spotify subscription,” Schulz said.
In the past three years, according to a study by NerdWallet, income has grown by 7 percent, while consumer prices have increased by 16 percent.
A December Survey by US News & World Report asked consumers to name the main reason for their credit card debt. The most common answer is “increasing prices with insufficient income.” Most respondents cited unexpected expenses, medical emergencies, job losses and auto repairs. Only one-tenth of those with credit card debt blamed their balance on frivolous spending.
“The pressure that people feel from the increase in prices at the grocery store or at the gas pump, causes this situation where people use more of their income even though they are not using it much,” said Bruce McClary, a senior vice president at the nonprofit. National Foundation for Credit Counseling. “The things they usually buy are more expensive.”
American credit card consumers fall into two camps. One part, big but small, pays the card balance each month. Card companies call those customers “deadbeats,” a term laden with derision. Consumers with no bad credit don’t make a lot of money for card companies because they don’t spend a lot of money for the privilege of carrying a credit card.
Another group, small but growing, takes credit from one month to another. In a US News survey, 15 percent of respondents reported card balances of $10,000 or more.
At current interest rates, a five-figure credit balance can cripple a household budget.
A household with $7,486 in total debt, as measured by NerdWallet, and an average interest rate of 20.4 percent, would need to spend $695 a month to retire the debt in 12 months, according to a online interest rates.
What if the family can only afford $200 a month? Then pay the balance for five years. By the time the debt is repaid, if the interest rate remains constant, the family will spend $4,239 on top of the $7,486 borrowed. And all of this assumes that the family never uses the card again.
Credit rates and interest rates are rising. The Federal Reserve raised interest rates by more than 4 percent in 2022, one of the most dangerous measures to freeze money in American history, to reduce inflation.
The rate hike pushed mortgage rates to their highest levels in more than a decade, about 7 percent.
Credit rates are higher than mortgages. Lenders want to make a profit, and they issue cards to customers with high credit scores, with some people having trouble. buyer cannot pay the debt.
As recently as 2016, credit card rates hovered around 13 to 14 percent: high but not like today. At the beginning of 2022, the average credit card came with a 16 percent interest rate. At the end of the year, the average was up to 20 percent.
Most card buyers -43 percent c one recent study — not knowing how much interest they will pay.
“I have a lot of cards, and I couldn’t tell you the price on any of them,” says Sara Rathner, a credit expert at NerdWallet. “If you pay your bills in full every month, it’s not a problem.”
Lenders often sell credit cards that are low on interest and mostly on “rewards,” offering benefits like small cash back. to the customer on additional purchases, credit for air travel, or “tokens” that can be redeemed for any number of products. or services.
“When you look at a credit company’s marketing materials, what do you see? You see rewards,” said Rodney Sullivan, executive director of the Richard A. Mayo Center for Asset Management at the University of Virginia’s Darden School of Business “It’s front and center, always.”
Credit card buyers also tend to focus more on rewards than prices. In a recent Bankrate survey, 36 percent of cardholders cited rewards as the best feature of their card. Only 10 percent cited a competitive interest.
“You’re definitely going to see a lot of people get cheated by rewards because you cheat,” Rathner said. “And most of them are hopeful.”
Flight attendants roam the planes offering card applications that may one day lead to a first-class ticket to Rome.
“Humans, by our nature, we like rewards,” Sullivan said. “We are happy to receive the benefits.”
Credit card decisions can provide meaningful benefits to the cardholder who has too many payments and pays off the balance each month. The debt cannot be retired, however, and the game quickly turns to the player.
“Those rewards,” Sullivan said, “don’t count the 20 percent interest you’ll pay.”
Trying to escape from the pit of debt? Here are six strategies to consider.