The Federal Reserve Bank of New York has conducted research that has shown very interesting results. According to the report, credit card debt in America reached a record $1.14 trillion in the second quarter of this year.
Compared to the data from last year, it is evident that the credit card debt in the country has increased and might even get much higher soon. However, there is something the Federal Reserve can do to stop this from happening.
What Is Credit Card Debt in the US?
Using credit cards to pay for things is an everyday lifestyle for Americans. A report published in May by Urban Institute showed that 6 in 10 adults used their credit cards to buy groceries in 2023. However, credit card debt only occurs when a client of a credit card company purchases a service or buys an item through the card system.
When customers do not pay the credit card company for the money they have spent, interest and penalties increase the amount owed.
Is There a Trillion in Credit Card Debt?
According to the Federal Reserve Bank of New York’s research, consumers in the United States collectively owe a record $1.14 trillion in credit card debt. This is a $27 billion increase from the 1.13 trillion that was reported in the second quarter of 2024.
As the economy keeps surging in the number of problems such as unemployment, high housing rates, high cost of food, and auto rates, the cost of living for most Americans is quite high.
The People With High Credit Card Debt
These people who have high credit debts are usually in the young adult generation. According to a recent New York Fed press call, these borrowers are often between the ages of 18 and 29 and 30 and 39.
These young adults were likely hit quite hard during the COVID-19 pandemic and did not have a lot of savings to fall back on. In addition, the research showed that renters who have low credit limits and credit histories were more financially unstable, leading to credit card debt.
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Why Is Credit Card Debt So Bad in America?
Since the pandemic hit in 2020, credit card debt has constantly risen, among other things. The New York Fed researchers said this could be because many millennials had to enter the labor market during a tough period, and the economy is still recovering.
Therefore, they are also feeling the after-effects of an economy that is still trying to get back on its feet. Credit card debt is so bad now and is predicted to continue that way for a while.
Why Do People Gather So Much Debt on Their Credit Cards?
Nobody wants to be knee-deep in credit card debt. However, many people find themselves in debt and find it difficult to get out of this challenging position. There are several reasons why people accumulate a lot of debt on their credit cards, and many are not things that they can control.
For example, the pandemic forced many active workers out of their jobs, causing them to accumulate debt to meet their essential needs.
Prolonged Debt Plays a Role
Ted Rossman, senior industry analyst at Bankrate, said, “More people are carrying more debt for longer periods of time,” and this is true. The longer one leaves a credit card debt unpaid, the more interest and other fees increase.
Therefore, it will be harder for people to pay off their debt when it continues to increase. About 7.18% of cardholders fell into delinquency in the second quarter of the year, while the first quarter of 2024 recorded 5%.
The Post Pandemic Debt
Americans Rossman also noted that the relief funds provided by the government during the pandemic in 2020 helped some people pay off some of their credit debt. However, after the pandemic in 2021, credit card debt on mortgages and auto loans shot up by $77 billion and $10 billion, respectively.
Around the country, credit card debts skyrocketed by 48%, and Rossman says this was “fueled by a post-pandemic boom in services spending as well as high inflation and high interest rates.”
The Increasing Interest Rates
The prices of plastic used to make credit cards have also increased significantly, thanks to inflation. Credit card companies have increased the interest rates on new credit cards to make up for this surge.
The current rate is 24.84%, the highest LendingTree has recorded since it started tracking these rates in 2024. On the bright side, this could see a huge drop soon if the Federal Reserve cuts its rates next month.
Research Shows That 36% of Americans Are Finding It Hard To Keep up With Bills
Achieve, a credit card company also conducted a survey in June that showed that 57% of consumers rely heavily on credit cards to make ends meet. The company polled 2,000 adult participants with at least one kind of credit card debt.
In the survey, 36% of consumers noted that they found it quite hard to pay recurring debts on time. Many also said they fell behind on their payments because of reduced income and job loss.
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Credit Cards Are Now One of the Most Expensive Ways To Borrow Money in America
The New York Fed research showed that credit cards are one of the most expensive ways to borrow money. When the Federal Reserve increased interest rates to control inflation, credit card rates also surged relatively high.
This is because most credit cards have a direct connection to the Fed’s interest rates, and a rise will affect them, too. Therefore, a reduction will also cause their interest rates to follow suit.
Paying Your Debt Early Is Best
According to Rossman, it is “more important than ever to pay down this debt as soon as possible.” This is because credit card balances and interests are record-high points, and waiting will only increase your debt.
He also calculated that with this current annual percentage rate of 20% in America, someone who owes $6,218 can spend 18 years paying off this bill. What’s more, the person will end up paying more than $9,300 in interest alone, further proving that stacking up credit card debt does a lot of financial damage.
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