Americans are sinking into debt after hunkering down and building up their financial savings during the pandemic.
The sharp rise in credit card debt has been a long time coming as Americans increasingly rely on plastic when shopping. However, according to experts, the increase is largely due to factors such as inflation and high credit card interest rates.
Consumers racked up $180 billion in new credit card debt in 2022, the largest amount of debt ever added in a single year, according to a recent study by personal finance website WalletHub. Nearly half of that total — nearly $86 billion — was added in the fourth quarter, marking the largest quarterly increase in credit card debt.
The average household credit card balance was $9,990, up 9% from Q4 2021.
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What drives balance sheets to record levels?
“This is overall a chronic problem where we, as a society, have become more accustomed to using credit for everything,” said Michael Reynolds, board-certified financial planner and owner of Elevation Financial. “Credit card companies are incredibly good marketers, and credit cards have become the norm and a way of life for everyone.”
According to Reynolds, consumers psychologically detach themselves from the purchases they make when using a credit card, as opposed to a debit card or cash, which are more tangible forms of payment. “That distance makes people feel less pain or stress when using credit. It doesn’t feel like they’re spending real money,” he said.
More recently, government stimulus programs during the pandemic, such as improved unemployment benefits, have injected cash into households accustomed to the financial cushion — even as it dried up.
“I think a lot of people got used to spending cash that they didn’t otherwise have,” Reynolds said. “They got into patterns that involved a higher level of spending, which is what they’re using debt for now,” he added.
High inflation has also fueled Americans’ mounting credit card debt, with millions living paycheck to paycheck. Typically, it’s consumers’ day-to-day living expenses or some sort of emergency expense that gets people into trouble — not wasteful expenses.
“Everything seems to cost more. People are paying more for food, housing and gas. In general, it’s the practical things that get people into credit card debt,” said Ted Rossman, credit expert at CreditCards.com. “All of this contributes to increased balances.”
Record the APR
At the same time, credit card interest rates are rising, causing Americans’ outstanding debt to grow faster. The average credit card rate rose to a record high of 20.4% this week, according to a report by CreditCards.com.
The Best Way to Get Rid of Credit Card Debt? Stop using your cards, Rossman said. “If you’re in a hole, stop digging.”
Reynolds is encouraging its customers to take a three-month credit card break and instead use debit cards or cash for all purchases.
“They usually spend less because when you spend on a debit card it’s real money in your bank account and your balance goes down immediately. With a credit card, there’s a month-long lag between the act of buying something and when you actually have to pay for it,” he said.
Rossman’s top tip for consumers looking to shed their credit card debt is to transfer all of their debt to a 0% transfer card that doesn’t charge interest for up to 21 months.
“It’s so important to prioritize the interest rate,” he said.