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Credit Card Debt Reaches Record High

Americans’ credit card balances rose quickly in the second quarter, reaching a milestone of 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, with the largest increase among all types of debt. Over two-thirds of Americans had a credit card in the second quarter, which is an increase from around 59 percent a decade ago. Additionally, card balances were over 16 percent higher in the second quarter of this year compared to the same period last year.

Ben Alvarado, executive vice president and director of core banking at California Bank & Trust, commented on the situation, saying, “It’s easy to become overwhelmed by credit card debt, and $1 trillion tells us that many Americans are making purchases with money they don’t necessarily have.”

In a recent report by TransUnion, it was found that with the rising prices of goods and services, consumers are increasingly relying on credit cards to cover their expenses. This trend is particularly noticeable among younger adults who are dealing with tighter budgets.

Despite the higher prices and increasing interest rates resulting from the Federal Reserve’s efforts to control inflation, the New York Fed researchers stated that there is currently “little evidence” of widespread financial distress among consumers. They found that credit card delinquencies, which were unusually low during the pandemic, have returned to pre-pandemic levels.

However, the rising balances could pose challenges for certain borrowers, especially those who are scheduled to begin repaying student loans in October after a three-year break.

Credit counselors have reported worrisome trends and noted that the higher reported balances are expected. GreenPath Financial Wellness, a national credit counseling agency, stated that the median card balance for the clients it counseled in July was $7,717, up from $4,298 in July 2022. The agency also reported a 50 percent increase in inquiries from people citing student loans as a reason for their calls.

A recent survey by Empower found that a third of households with student debt anticipate monthly loan payments of at least $1,000. These households are preparing for significant lifestyle and budget changes as repayment begins, including cutting back on dining out and potentially taking on more credit card debt.

For individuals who do not pay their credit card bill in full each month, the average interest rate charged on cards with balances was approximately 22 percent in May, as reported by the New York Fed. TransUnion data for the second quarter revealed that the average card debt per borrower was nearly $6,000. Making only the minimum monthly payment, it would take a borrower about 18 years to pay off the debt, with an interest cost of almost $9,500, according to Ted Rossman, senior industry analyst with Bankrate.

To mitigate potential debt problems, borrowers with federal student loans should explore if they qualify for income-driven repayment plans. Reviewing spending habits and debts is also recommended by experts. There are two popular strategies for paying down credit card debt: either paying off the card with the highest interest rate first or paying down the card with the lowest balance first to build momentum. Regardless of the strategy, it is important to make minimum payments on all other cards to avoid late fees and damage to credit. After paying off a credit card, it is beneficial for credit score purposes to leave the account open with minimal usage.

Here are some common questions and answers about credit card debt:

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

Many borrowers are using personal loans to pay off high-interest credit cards. However, this approach may only provide short-term benefits unless card spending is controlled after consolidation. According to TransUnion, borrowers who used personal loans to consolidate credit card debt experienced a 57 percent decrease in their card balances on average. However, 18 months later, the card balances had risen back to almost their previous levels.

In general, it is not advisable to use credit cards to pay off student loans. Both the federal government and private student loan lenders do not allow it because card issuers charge fees, and there is a delay in receiving the funds. Additionally, credit cards typically have much higher interest rates compared to student loans.

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