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Credit Card Debt Reaches Record High

Americans’ credit card balances rose quickly in the second quarter, reaching over $1 trillion, according to a report from the Federal Reserve Bank of New York. Credit card debt is the most common type of household debt and saw the highest increase among all types of debt. Over two-thirds of Americans had a credit card in the second quarter, up from 59 percent a decade ago. Card balances were more than 16 percent higher in the second quarter of this year compared to a year earlier.

Experts warn that accumulating credit card debt can lead to financial distress, as it indicates that many Americans are spending money they don’t actually have. As prices of goods and services rise, consumers are increasingly relying on credit cards to cover their expenses. Younger adults are particularly turning to credit to cope with tighter budgets.

Despite rising prices and interest rates, there is currently “little evidence” of widespread financial distress among consumers, according to the Fed researchers. Delinquencies on credit card payments, which were abnormally low during the pandemic, have returned to pre-pandemic levels. However, the increasing balances could strain some borrowers, especially those who will begin repaying student loans in October after a three-year break.

Credit counselors have noticed concerning trends and report that the higher reported balances don’t come as a surprise. The median credit card balance for clients seeking counseling in July was $7,717, up from $4,298 in July 2022. Counselors have also observed a 50 percent increase in inquiries related to student loans in July. GreenPath Financial Wellness anticipates a further increase in September as loan services start notifying borrowers of their repayment obligations.

A recent survey by financial services company Empower found that a third of households with student debt expect monthly loan payments of at least $1,000. Many are preparing for significant lifestyle and budget adjustments when repayment begins, such as cutting back on dining out and taking on more credit card debt.

For individuals who do not pay their credit card bills in full each month, the average interest rate charged on cards with balances was about 22 percent in May, according to the New York Fed. The average credit card debt per borrower was nearly $6,000 in the second quarter. Making only the minimum monthly payment, it would take approximately 18 years and nearly $9,500 in interest to pay off the debt. Experts recommend exploring strategies to manage credit card debt, such as income-driven repayment plans for federal student loans and prioritizing payments on high-interest cards.

Two popular strategies for paying down credit card debt include paying off the card with the highest interest rate first to save the most money, or paying off the card with the lowest balance first to build success momentum. Whichever approach is chosen, it is important to make minimum payments on other cards to avoid late fees and damage to credit. Once one balance is paid off, the extra cash can be directed towards the next card.

After paying off a credit card, it can be beneficial to leave the account open while using it minimally. This can have a positive impact on the individual’s credit score, as having more unused credit improves the score.

Here are some questions and answers about credit card debt:

Balance-transfer offers at zero percent interest are still available for individuals with FICO credit scores of 670 or higher. However, it is important to ensure that the transferred balance can be paid off within the designated time frame, usually 15 to 18 months. There is typically a fee of 3 to 5 percent of the transferred balance.

Many borrowers are turning to personal loans as a way to pay off high-interest credit cards. However, the benefits may be short-term unless card spending is controlled after consolidation. Data from TransUnion shows that individuals who used personal loans to consolidate card debt saw a 57 percent decrease in their card balances on average. However, 18 months later, the card balances had risen close to their previous levels.

In general, it is not recommended to use credit cards to repay student loans. Neither the federal government nor private student loan lenders allow this practice. Credit cards typically have much higher interest rates compared to student loans.

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