According to the latest data from the Federal Reserve, credit card debt in America has surpassed $1 trillion, the highest amount since the recession began in 2008. While economists see the positive aspect of these figures as consumers feeling confident in the economy and buying big-ticket items, for the average consumer, the real situation is not so rosy.
The United States reached the $1 trillion threshold once before, back in December of 2007, when credit card debt totals surpassed the milestone and remained above it for 13 months.
By most indications, the economy is growing. Job growth is steadily rising, unemployment is down, and the Fed recently raised target interest rates. When people have employment, they feel confident and ultimately spend more.
Economists are quick to point out that a third of this debt is paid at the end of each month before finance charges accrue, leaving only $650 billion, but the fact remains that the average household carries more than $9,000 in credit card debt from month to month.
One of the contributing factors to the higher credit card debt is that the Federal Reserve has hiked key interest rates three times already in 2017; and, because most credit cards have variable rates, their rates have risen as well. According to WalletHub, the interest rate increases since 2015 have contributed $4.3 billion in additional interest charges to consumers through 2017. This results in higher monthly payments.
After the three rate hikes of 2017, the average annual interest charges for credit cards went from $1,185 to $1,254, an increase of $69 more per year in interest alone. Predictions call for two more hikes this year, and if they pass, it will bring that figure up to $1,301, or $116 more per year on average.
Increases in monthly credit card payments lead to more people forced to pay only their minimum monthly amount due, which draws consumers into an ever-deepening hole where principal balances and minimum monthly payments due begin to grow exponentially. Missed credit card payments have been considerably low in recent years. However, they are beginning to rise, indicating that consumers are beginning to show signs of needing help.
While job growth is encouraging, income rates aren’t rising as quickly as other key components are. In the past decade, the cost of medical expenses has risen 57%. Housing has risen 32%. Wages have risen a mere 21%. Income just can’t keep up.
As consumers, we know the traps of regular credit card usage, so why do we continually fall into it? Some point to the increasing quality of reward programs. A recent survey revealed that 60% of consumers count credit card reward programs as the driving force behind the acquisition of a credit card. Credit card companies are offering greater rewards that entice consumers, including cash rewards, gift cards, and air miles, redeemable anytime instead on certain dates. However, these cards come at a price, usually higher interest rates, and if you’re carrying a balance, you’re ultimately just paying for your own rewards anyway.
Many cards are currently offering 0% APR on transfers for 18 months, some even as long as 21 months. If you can find these offered with less than a 3% transfer fee, it may be worth taking advantage of the offer.
Before the new rate hikes happen, it’s a good time to focus on paying down credit card debt, whether by shopping around for offers, devoting more of your on-hand cash to paying off credit cards, or seeking the guidance of debt relief specialists. Credit card debt should slow, and a crisis seems unlikely at this point, but the longer you wait to fix your credit card debt, the more it will cost you.
