Americans’ credit card debt rose 18.5% to $930.6 billion, a record high, in 2022, according to a report by TransUnion. This is due to rising interest rates, which have already reached nearly 20% on average, and the increasing costs of necessities such as food and rent.
The average balance per credit card rose to $5,805 and it would take over 17 years to pay off this average balance with minimum payments, incurring over $8,213 in interest, according to Bankrate.
With 202 million new credit accounts being opened in the fourth quarter, the number of credit card accounts in the US is at a record high of 518.4 million, with a rise in subprime borrowers (credit score of 600 or below).
However, delinquencies also rose, defined as a payment 60 days or more overdue, as lenders expand access to less experienced credit users. The unemployment rate remains low, but if it rises and delinquencies increase, it would indicate a longer-term problem, according to the report.
To tackle high-interest credit card debt, borrowers can consider zero percent balance transfer credit cards, refinancing into lower-interest personal loans or taking on a side hustle and cutting expenses.
Effects of high credit card debt
Credit card debt can have a major impact on consumers’ overall financial stability, reducing their spending power and leading to a higher risk of falling into debt traps. According to a study by the Federal Reserve, the average credit card debt per household was $7,703 in 2021. The impact of high credit card debt becomes even more pronounced when considering the high interest rates and longer payment periods that result in consumers paying more in interest than the original debt.
Increased interest payments
Credit card companies charge high interest rates on unpaid balances, which can extend the time required to pay off the debt and lead to a vicious cycle of increasing debt. For example, if a consumer has a credit card with an interest rate of 18% and a balance of $10,000, the monthly interest payment alone would be $150. Over the course of a year, the consumer would pay $1,800 in interest, more than 10% of the original debt.
Impact on credit score
High credit card debt can also have a significant impact on a consumer’s credit score, which can impact their ability to get loans, credit cards, or even a job in the future. Late or missed payments can lower a credit score, making it more difficult and costly to obtain credit in the future. For example, a consumer with a credit score of 750 has a much better chance of obtaining a loan with a lower interest rate than a consumer with a score of 550.
Mental and emotional well-being
If not properly managed in time, high credit card debt can lead to financial stress and anxiety, affecting a person’s mental and emotional well-being. This stress can cause individuals to make impulsive financial decisions, further exacerbating their financial situation. A survey by the American Psychological Association found that 72% of people reported that money was a significant source of stress, and 40% of respondents stated that they had lost sleep due to financial worries.
The rising U.S. credit card debt presents a significant challenge for consumers’ financial stability. The high interest rates, increased delinquencies, and prolonged payment periods lead to an increased burden of interest payments, reducing spending power and increasing the risk of falling into debt traps. As mentioned above, measures like making timely payments might help lower monthly payments, reduce interest payments, and ultimately enhance overall financial stability and well-being.