Personal finance

Credit card balances jump 15%, highest annual leap in over 20 years, as Americans fall deeper in debt

In an economy that has produced the highest inflation rate since the early 1980s, Americans are struggling to keep up with day-to-day expenses.

More consumers are now relying on credit cards to get by, which has helped propel total credit card debt to $930 billion in the third quarter, just shy of the all-time record, according to a new report from the Federal Reserve Bank of New York.

Credit card balances climbed more than 15% from a year earlier, the largest annual jump in more than 20 years.

“With prices more than 8% higher than they were a year ago, it is perhaps unsurprising that balances are increasing,” the Fed researchers wrote in a blog post. “The real test, of course, will be to follow whether these borrowers will be able to continue to make the payments on their credit cards.”

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Why it’s ‘harder than ever’ to eliminate credit card debt

Meanwhile, “high inflation and high interest rates are making it harder than ever to pay down credit card debt,” said Ted Rossman, senior industry analyst for CreditCards.com.

Not only are credit card balances back to pre-pandemic levels, but consumers are also carrying balances for long periods.

Among Americans who carry credit card debt from month to month, 60% have been in credit card debt for at least a year, according to CreditCards.com.

As the Federal Reserve raises its target federal funds rate, credit card annual percentage rates are climbing as well. 

High inflation and high interest rates are making it harder than ever to pay down credit card debt.
Ted Rossman
senior industry analyst for CreditCards.com

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, too, and credit card rates follow suit. Cardholders usually see the impact within a billing cycle or two.

Already, credit card rates are roughly 19% — an all-time high — up from 16% earlier in the year.

Further, those rates will continue to rise since the central bank has indicated even more increases are coming until inflation shows clear signs of a pullback.

The best thing you can do now is pay down high-interest debt with a 0% balance transfer card, Rossman advised. Otherwise, consolidate and pay down credit cards with a lower-interest personal loan, he said.

Check your net worth to ‘provide clarity’ on priorities

How much money you need to earn to cover expenses and save for the future comes down to understanding your net worth and your goals, according to Paul Deer, a Boulder, Colorado-based certified financial planner and vice president of advisory service at Personal Capital.

Your net worth is essentially the sum of all of your assets — including cash, retirement accounts, college savings, house, cars, investment properties and valuables such as art and jewelry — minus any liabilities, or long-term debt, such as a mortgage, student loans, revolving credit card balances and any other personal loans.

“First and foremost, is your net worth growing or shrinking over time?” Deer said. If your net worth has been declining, it’s important to work on saving more and spending less. 

From there, consider the milestones you want to achieve going forward, Deer said, whether that’s retiring, buying a home or paying for your child’s or grandchild’s education.

“Laying those out can really help provide clarity over what you should be prioritizing today.”

Most people agree that they need to cut costs to build up their savings, and yet reports show consumers haven’t pulled back on food, entertainment or travel.

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