Credit card balances hit a record $1.08 trillion. How we got here

Americans now owe $1.08 trillion on their credit cards, according to a new household debt report from the Federal Reserve Bank of New York.

Credit card balances climbed $154 billion year over year, the largest increase since 1999, the New York Fed found.

“Credit card balances rose sharply in the third quarter, consistent with strong consumer spending and real GDP growth,” said Donghoon Lee, economic research adviser at the New York Fed. .

Credit card delinquency rates have also increased across the board, according to the New York Fed, but particularly among millennials, or borrowers ages 30 to 39, who are burdened by high levels of student debt .

While most people feel strained by rising prices – especially for food, gasoline and housing – more and more cardholders are falling into month-to-month debt or are in debt. behind on their payments, and a larger percentage of balances are more than 180 days past due, according to another report. report from the Consumer Financial Protection Bureau.

Nearly a tenth of credit card users find themselves in “persistent debt,” where they have to pay more interest and fees each year than they pay for principal – a trend that is growing harder to break, the consumer watchdog said.

“It’s a big deal,” said Ted Rossman, senior industry analyst at Bankrate. “Your credit card is probably your most expensive debt by far.”

Credit card rates were already high, but they have recently climbed in conjunction with the Federal Reserve’s series of 11 rate hikes, including four in 2023.

Since most credit cards have a variable rate, there is a direct link to the Fed’s benchmark. As the federal funds rate increased, the prime rate also increased, and credit card rates followed suit.

The average annual rate now stands at over 20%, which is also a record level.

Despite their high cost, consumers often turn to credit cards, in part because they are more accessible than other types of loans, according to Matt Schulz, chief credit analyst at LendingTree. But this comes at the expense of other long-term financial goals, he added.

“That’s money that’s not going to a college fund or a down payment on a house or a Roth IRA,” he said.

Until recently, most Americans benefited from few government-provided safety nets, including the massive infusion of stimulus funds, which left many households sitting on a stockpile of cash that enabled some holders card to control the balance of their credit cards.

But that cash reserve largely disappeared after consumers gradually spent their excess savings from the Covid-19 pandemic years.

Today, “consumers maintain and support their lifestyles using credit card debt,” said Howard Dvorkin, a CPA and president of Debt.com.

“It’s been a struggle,” said Adriana Cubillo, 25, of Modesto, California. “My rent is going up, so even though all my bills are paid, I’m sometimes living paycheck to paycheck.”

Still, consumer credit scores have remained high, helped by a strong job market and slowing inflation, as well as the removal of some medical data from consumer credit reports, according to recent reports.

If you carry a balance, try calling your card issuer to ask for a lower rate, consolidate and pay off high-interest credit cards with a lower-interest home equity loan or personal loan, or switch to an interest-free balance transfer credit card. , advised Schulz.

To maximize their credit card benefits, consumers should regularly compare credit card offers, pay off as much of their balance as possible as soon as possible and avoid paying their bill late, said Mike Townsend, a spokesman for the American Bankers Association.

“Any credit card holder who finds themselves in a difficult financial situation should always contact their card issuer to inform them of their situation,” Townsend said. “They may be entitled to relief or assistance depending on their individual circumstances.”

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