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More Americans are relying on their credit cards in the face of rising rates. And as interest rates continue to rise, the cost of that debt increases a lot.
The average credit card user carried a balance of $5,474 last fall, according to TransUnion, up 13% from 2021.
This is a reversal of the pandemic’s first year, when many Americans were able to pay off credit card debt, thanks to generous government relief payments and limited spending on travel and entertainment.
As credit card balances swell again, it can take a toll on a family’s finances.
Here’s what to know about increasing credit card debt — and what you can do about it.
It’s the everyday things that people charge
With inflation outpacing income, more people are relying on credit cards for everyday expenses.
“Contrary to popular opinion, this is not usually a vacation or a shopping spree,” says senior industry analyst Ted Rossman of Bankrate. “It’s usually very practical to get you into credit card debt. Unfortunately, it’s easy to get in and out of.”
Mel Murphy’s rent devoured two-thirds of her income as a part-time custodian in Spokane, Washington, leaving little room for maneuver when unforeseen expenses arose.
“Every time my pickup suddenly needed $300 worth of work, or I had an elderly cat, every time I needed emergency surgery, she’d carry the credit card,” says Murphy.
Few people pay off their balances every month
The percentage of credit card users with a balance rose to 46% from 39% a year ago, according to Bankrate.
“Nearly half of cardholders take on debt from month to month,” says Rossman. “This debt is as expensive as ever.”
Low-income cardholders are more likely to carry a balance. But even among people who earn $100,000 a year or more, 37% don’t pay their credit card bill in full each month.
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Carrying over card balances is expensive
The average interest rate on credit card debt has risen to nearly 20%, from just over 16% at the start of last year. This is the largest one-year increase in the four decades that Bankrate tracks rates.
The Federal Reserve has been aggressively raising interest rates in an effort to curb inflation. Every time a central bank raises rates, the cost of carrying a balance on your credit card goes up as well.
But when Bankrate conducted a survey last month, they found that more than 4 in 10 credit card holders don’t even know their interest rate.
“You don’t often notice that in the monthly statement,” says Rossman. “Your minimum payments might shift by just a few dollars a month. But the problem is, when you pull it out for a decade and a half, that’s where it really feels.”
There are ways to lower your cost of credit
Of course, the best thing to do if you find yourself with a large credit card debt is to pay it off as quickly as possible. But if you have to take on debt, there are ways to save.
Some card issuers offer zero percent interest on balance transfers, but only for a limited time. Alternatively, it may make more sense to get a low-interest personal loan or consult with a non-profit credit counselor about steps to reduce your interest expenses.
Don’t chase credit card rewards if you’re carrying debt
Instead of looking for a card with the lowest interest rate, many people prioritize rewards, such as cash back. But if you’re carrying a balance, it might be wrong.
“If you have debt, I would say you completely forget about rewards. Because it just doesn’t make sense to pay 20% interest to get 1, 2, even 5% back, or airline miles,” says Rossman. “You have to put in that interest rate first and then worry about the rewards later, once you’ve paid them off.”
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