Credit cards offer consumers many perks today, such as cash back and travel rewards. But there is growing evidence that Americans are struggling with a significant credit card debt problem.
The latest data from the Federal Reserve Bank of New York shows that credit card debt rose by $27 billion in the second quarter of this year, an increase of 5.8 percent. This increase brings Americans’ credit card debt to a record high of $1.14 trillion.
And it’s not just the large amounts Americans owe overall; it’s also becoming increasingly difficult for consumers to pay off their debts, as many credit cards charge high interest rates. Here’s what’s happening and what solutions are available.
High balances are not the only problem
An estimated 50% of all Americans carry a monthly credit card balance. That’s not good news, and it’s even worse when you consider that credit card defaults are on the rise, especially among younger consumers.
Two years of rising inflation have hurt the budgets of many Americans, and although inflation has cooled recently, many expenses – from groceries to household goods – are higher today than they were just a few years ago.
However, inflation does not show the whole picture. Credit card interest rates have risen to 21.5% in recent years and the average card balance has increased to $6,329.
High interest rates make it much harder for many consumers to pay off their debt. For example, here’s the interest you would pay if your average credit card balance is $6,329 and you pay an APR of 21.5%:
|
Years to pay off the balance of $6,329 |
Interest amount paid |
|---|---|
|
1 |
761 US dollars |
|
2 |
$1,514 |
|
3 |
$2,314 |
|
4 |
3,160 USD |
|
5 |
4,052 USD |
Data source: Ascent Credit Card Repayment Calculator.
Given the high credit card interest rates, many Americans could easily Thousands in interest when paying off the average credit card balance.
A way to pay less credit card interest
If you’re having trouble making your credit card payments, transferring your balance to a card with a 0% introductory interest rate may help.
These balance transfer cards can help you pay off your balance faster and with less interest if you use them correctly. It’s worth noting that many balance transfer cards charge a one-time transfer fee of 3% to 5% of the balance.
Let’s say you have a credit card balance of $6,329 and pay 3% to transfer it to a card with a 21-month introductory 0% interest rate. With the fee, your balance would be about $6,582.
If you pay $315 per month on the balance, your credit card debt will be paid off within 21 months, and you will pay $0 interestHowever, if you leave the original balance of $6,329 on a card with a 21.5% APR and pay off the balance over 21 months, you’ll pay $1,321 in interest!
For some people who need immediate relief from a high APR, balance transfer cards may be the right solution. Just be careful not to add more debt to your balance transfer card. Instead, create a debt repayment plan that aims to aggressively reduce your credit card balance each month while you have the low introductory interest rate.
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