The outstanding credit card debt held by Americans is nearing a significant milestone, almost reaching $1 trillion, as stated in the most recent data from the Federal Reserve Bank.
Rising inflation rates, reaching levels not seen in nearly 40 years, have led many consumers to rely on credit cards to manage their finances, resulting in historically high balances, according to the “Q1 2023 Credit Industry Insights Report” by TransUnion. Michele Raneri, Vice President of U.S. Research and Consulting at TransUnion, noted this trend.
On average, the credit card debt carried by Americans stands at approximately $5,733, as indicated in TransUnion’s latest report. However, when examining this by age groups, it becomes evident that most individuals hold more than this average amount.
Ted Rossman, Senior Industry Analyst at Bankrate.com, emphasized that Generation X individuals might be particularly strained by credit card debt due to their current life circumstances. Many of them are dealing with the financial responsibilities of caring for aging parents while also supporting their own children, potentially even funding their college education.
In contrast, the youngest users of credit cards, aged 18 to 29, carry an average debt of around $2,900, according to TransUnion’s data. This is unsurprising considering that many in this age group are just starting to use credit cards and establish their credit history.
The cost of credit card debt has risen substantially due to the record-high interest rates. Rossman highlighted the fact that more people are carrying larger debt balances, and these balances are incurring higher costs than before.
Paying off credit card balances in full each month has become more financially burdensome. Interest rates have surpassed 20%, as per Bankrate’s analysis in May, compared to an average of around 16% a year earlier.
The Federal Reserve’s series of interest rate hikes since March 2022 have contributed to this situation. The purpose behind these rate increases is to make borrowing more expensive for consumers, as part of the Fed’s efforts to curb inflation.
Addressing credit card debt requires strategic approaches, particularly when caught in a cycle of accumulating debt. Rossman offered two strategies for debt repayment.
- Utilizing a 0% balance transfer credit card: Rossman suggested that a 0% balance transfer card could be instrumental in managing credit card debt. These cards allow transferring existing debt to a new card with an introductory period of 0% APR that can extend up to 21 months. This allows individuals to chip away at their debt without incurring interest charges each month. Rossman recommended devising a monthly payment plan by dividing the total debt by the interest-free period’s duration.
It’s crucial to note that not everyone qualifies for a balance transfer, and approval might require a good to excellent credit score. Additionally, keeping track of payment deadlines and assessing any balance transfer fees is essential.
- Consolidating credit card debt through a personal loan: If multiple credit card balances are involved, Rossman suggested considering a personal loan for consolidation. This approach entails applying for a personal loan large enough to cover all credit card debt. Upon approval, individuals can promptly pay off their credit cards and repay the loan at a more favorable interest rate. As of May 31, the average interest rate for personal loans was slightly above 11%, according to Bankrate.
Individuals with a strong credit score might secure a personal loan with an interest rate as low as around 7%, with a repayment period of five to seven years.
It’s important to be mindful of potential impacts on one’s credit score if payments are missed, and to recognize that obtaining another loan would be necessary once the initial funds from the personal loan are exhausted.