Americans may have a love-hate relationship with their credit cards, but that’s not preventing them from piling on debt.
The country’s outstanding credit card and other types of revolving debt have jumped almost 20% from a decade ago, reaching an all-time high of about $1.1 trillion, according to a recent study from CompareCards.
The average balance on a credit card is now almost $6,200, and the typical American holds four credit cards, according to the credit bureau Experian. Credit card issuers are also giving Americans more room to run up debt, boosting the typical credit limit by 20% over the last decade to $31,000.
The reasons for the spike in credit card debt are complicated and potentially worrisome, financial experts say. A middle-class lifestyle has become more expensive with the cost of health care and education outpacing wage growth, prompting more households to rely on their cards to cover emergency expenses and daily spending, experts say.
“If you have credit card debt when times are good, it means you probably aren’t putting away as much money as you should for when things eventually go south – and things always eventually go south,” says Matt Schulz, chief industry analyst at CompareCards.
What’s eye-opening are the types of expenses consumers blame on their credit card debt, says Michael Micheletti, director of corporate communications for Freedom Debt Relief. The debt-reduction company in January surveyed more than 2,000 U.S. consumers about their debt, savings and outlook to get a snapshot of their financial health.
“Groceries are the number one reason why people carry a balance,” Micheletti says. “I was shocked, and I typically don’t get too shocked with these things.”
More consumers may be charging groceries because they’re strapped with other types of debt, such as student loans, which have doubled to about $1.6 trillion in outstanding debt since 2010, he notes. Auto loans and mortgages are also at all-time highs. After repaying monthly home, auto and student loans, some consumers don’t have much wiggle room, Micheletti adds.
“Everyday expenses you used to pay cash for, you are now putting on your credit card,” he notes.
Some households are also relying on credit cards when they’re in a pinch. Seven in 10 consumers would have trouble coming up with $500 for an unexpected expense, the survey found.
A decade of expansion
Rising credit card debt isn’t necessarily negative in itself. A strong job market and growing economy mean consumers are more optimistic about job security and their financial outlook, says Gannesh Bharadhwaj, general manager of credit cards at Credit Karma.
“A decade ago, we were just starting to come out of the recession caused by the financial crisis,” he notes. “Since then as the economy has recovered and strengthened, consumers have increased their borrowing as they tend to do during good times.”
And by some measures, consumers are financially healthier. Credit scores reached an all-time high of 703 last year, out of a possible 850 points. Credit-card delinquencies have dropped by half from a decade ago, CompareCards notes.
Even so, about 3 in 10 consumers believe their credit scores are too low – and high balances could be keeping them from boosting their scores. The utilization rate, or the percentage of your card’s available balance that you tap, is the second-biggest factor in your credit score behind your payment history, Schulz says.
“If you are somebody whose balance takes up most of your available credit, it will do some damage to your credit score,” Schulz notes.
Paying down debt
Consumers who carry credit-card balances should focus on paying down their debt in 2020, not only to strengthen their credit scores, but to ensure they’re in better financial shape when the next recession occurs, Schulz says. The risk of a recession within the next year is considered low by many economists, but economic downturns are inevitable.
Here are steps to take:
Make a budget. First, get a handle on your household spending, recommends CompareCards’ Schulz. Then assess whether you’ll need to pare spending in some areas or earn more income.
Ask for a lower credit card interest rate. Calling your credit card company to ask for a lower rate can pay off: About 7 of 10 consumers who requested a rate reduction were successful, according to Bankrate.com. “We often see those interest rates reduced by up to five to six percentage points,” Schulz says. “That can be a significant savings.”
Open a balance transfer card with 0% interest or a personal loan. It may seem counter-intuitive to take out another credit card, but balance transfer cards – which offer 0% interest for an initial period – can help you save money on interest, providing flexibility to pay down debt, Schulz notes. Personal loans, which offer a structured repayment plan, can also be helpful.
The snowball versus avalanche approach. If you’re motivated by a quick win, the snowball method might be your go-to strategy. This prioritizes paying down cards with the smallest balances. The avalanche approach, though, could save more money in the long run, as this focuses on repaying cards with the highest interest rates.
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