Americans owe a record $1.08 trillion on their credit cards, according to a new report on household debt from the Federal Reserve Bank of New York.
Credit-card balances spiked by $154 billion year over year, the New York Fed found.
“Credit-card balances experienced a large jump in the third quarter, consistent with strong consumer spending and real GDP growth,” said Donghoon Lee, economic research adviser at the New York Fed. “The continued rise in credit card delinquency rates is broad-based across area income and region, but particularly pronounced among millennials and those with auto loans or student loans.”
Credit-card users aren’t likely to slow down in the fourth quarter, also known as holiday shopping season.
“It’s common to use credit cards through the holidays. It starts with Thanksgiving. … We do a lot of excess spending,” said Dave Willis, president and CEO at Tinker Federal Credit Union, which has 32 branches across Oklahoma.
That habit will be especially harmful this year because many of those credit cards are being used for everyday shopping like groceries.
“More people are starting to live off their credit cards,” Willis said. “When they use them for day-to-day expenses, at some point they reach the maximum.”
More cardholders are carrying balances month to month or falling behind on payments, and a greater percentage of balances are going more than 180 days’ delinquent, according to an October report from the Consumer Financial Protection Bureau.
The report shows nearly 10% of credit-card users are in “persistent debt” where they are charged more in interest and fees each year than they pay toward the principal – a pattern that could become increasingly difficult for some consumers to escape.
Willis said many people received federal pandemic stimulus money and increased state unemployment payments for a couple of years. Now they are back at work but may be underemployed and earning less than before the pandemic. On top of that, the cost of living is going up.
Even for people who continued to work throughout the pandemic, the cost of living and the cost of borrowing has gone up and “rent has gone through to roof,” he said.
“It’s already gotten to be very expensive for people. Income is not keeping up with expenses,” Willis said. “I’m not saying it’s out of control yet, but it’s kind of crazy.”
The result is a greater reliance on credit cards.
A November 2022 LendingTree survey found that nearly two-thirds of cardholders say they don’t pay their credit card balance in full every month. Nearly half (46%) of those cardholders say it would take them at least a year to pay it off.
A new LendingTree report includes the average credit-card debt by state. Credit cardholders in Connecticut have the highest average credit card debt at $9,408, while those in Kentucky have the lowest at $5,408. The average in Oklahoma is $6,401, according to LendingTree data.
Wealth management company D.A. Davidson & Co. revealed survey results Thursday that show 71% of Americans who plan to celebrate the 2023 holidays are stressed about their expected spending.
The survey shows 40% of credit-card owners currently are carrying a higher credit card balance than at this time last year. Of the respondents who plan to celebrate the holidays, 66% say they are taking advantage of sales and 46% are buying less.
Avoiding credit card debt
People get into trouble when they don’t plan their spending, said Tina Herndon, a Tinker Federal Credit Union financial educator.
Herndon advises consumers to budget for holiday spending – just like they should for everyday expenses. When it comes to holidays, birthdays and other celebrations, people often anticipate the cost of gifts but don’t budget for food, decorations or travel expenses, she said.
“Retail credit cards are pushed at every store at every checkout. Too many cards can affect your credit score,” Herndon said. “Be strategic about what credit cards you apply for and carry.”
An entrepreneur handyman might be smart to have a Lowe’s card but should use it only to purchase supplies for jobs he knows he will be paid for or for parts the client pays for up front, she said.
For large purchases like furniture, a loan often makes more sense, Herndon said. There’s a beginning, middle and end to a loan and the interest rate likely will be 8% or 9%. Retailers may offer 90 days same as cash, but they know it will take many consumers longer to pay and the interest rate can be 20% or 30%, she said.
“Credit-card rewards are another part of the problem,” Herndon said. They usually are 1% to 5% back, but users pay an average of 17% interest if they don’t pay off the balance every month.
Her best advice: “Don’t spend more than the money you have available at that moment.”
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