Americans continued to accumulate credit card debt this year, with total balances approaching $1 trillion sooner than some experts had predicted.
Data from the Federal Reserve Bank of New York on Monday found that US credit card holders now owe $986 billion. This is $59 billion higher than the record set in the last quarter of 2019, when balances reached $927 billion. It’s also the first time since 2001 that credit card debt didn’t decrease in the first quarter.
The sharp increase in credit card debt is a sign that some American families are forced to rely on credit cards for basic monthly expenses as inflation and high interest rates reduce their savings.
However, there are some ways consumers can use credit cards to their advantage, experts say, when used wisely.
“I’m not opposed to having a credit card, but you should only be able to use it in the context of a monthly budget,” Scott Inman, a financial advisor at GenWealth, told Yahoo Finance Live (video above). “I think that’s what we’re finding here is that people are having a hard time making ends meet in the context of where their income is.”
He added that credit cards are “not a piggy bank”.
Although inflation has shown some signs of slowing down, prices remain high.
Food prices rose 7.7% year-on-year in April. Meanwhile, the cost of transportation rose 11%, the Bureau of Labor Statistics said, and the cost of shelter rose 8.1%.
“There is no question that the current economic environment that we live in with spiraling inflation as it has over the past couple of years has put people in more trouble than they were before,” Inman said.
However, credit card holders should think twice before racking up debt. Overspending and defaults can hurt credit scores. According to LendingTree, a missed payment can drop your score by up to 180 points and stay on your credit report for up to 7 years.
“I understand that using a credit card may seem like a last resort, and it may indeed be the case, but when it comes to using a credit card, we ask our customers to understand and learn how to use it wisely,” Inman said.
He added that credit cards are not “a place to spend money on vacation. They are not a place to buy your next car or your next mini-game, they should be a last resort to leave a balance on a credit card.”
Not paying off your balance can turn into unmanageable debt especially if the Fed continues to raise interest rates.
The average APR for all existing credit cards rose to 20.09% in the first quarter of 2023, data from the Federal Reserve revealed, up from 19.07% in the fourth quarter. At the same time, the accrual card APR jumped to 20.92% from 20.40% in the fourth quarter of 2022.
Matt Schulz, senior credit analyst at LendingTree, writes that these are the highest rates the Fed has published since it first began tracking data in 1994.
“Of course, your best move is to make those interest rates a moot point by paying off your card debt in full, but that’s often easier said than done,” Schulz wrote.
One way: Transfer your debt to a 0% balance transfer card. With a 0% Balance Transfer card, borrowers can avoid paying interest on transferred balances for up to 21 months, depending on the card’s promotional terms. However, credit card issuers usually charge 3% to 5% of the balance per transfer – which can add up.
If you are not able to come up with an effective plan for [minimize credit card debt] Inman said, “In the near term, you have to look at some 0% offers. You have to attack credit card debt. Now.”
Gabriella is a personal finance correspondent at Yahoo Finance. Follow her on Twitter @employee.
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