July 12, 2024

The Rising Challenge of Paying Down Credit Card Debt

Image Credits: Robert Nickelsberg/Getty Images

When it comes to financial matters, most Americans keep a close eye on their mortgage rates, especially with the recent decision by the Federal Reserve to control the 30-year fixed rate at 7.19%. But what about their credit card debt? Surprisingly, many people are in the dark about the costs associated with their credit cards.

The Burden of Credit Card Debt

According to data from the New York Fed, credit cardholders collectively owe more than a staggering $1 trillion across approximately 578 million credit card accounts. Shockingly, the percentage of U.S. households carrying a credit card balance, which stands at around 47% according to a 2023 NerdWallet analysis, surpasses that of mortgages (40%) and car loans (41%).

“The Fed began influencing higher interest rates (through the target federal funds rate) in March 2022. Consumers have seen the immediate impact of higher interest rates on long-term loans like mortgages and auto loans and their credit card interest rates,” says Elizabeth Renter, data analyst at NerdWallet, based in Kansas.

The Alarming Rise in APR

Moreover, the average interest rates charged on credit card accounts have risen from just over 16% in February 2022 to just over 22% as of May 2023, as stated by Renter. “And if you carry a balance from one month to the next, this quiet increase could be costing you hundreds or even thousands of dollars,” Renter warns.

A jump from 16% to 22% in credit card interest rates might not seem significant. Still, depending on your balance and repayment period, those few percentage points can significantly inflate your debt, as highlighted by Renter.

For instance, imagine you have $10,000 in credit card debt and aim to pay it off in three years. That higher interest rate means making larger payments and, consequently, shelling out more interest over the three years.

The Impact on Monthly Budgets

While some loans, like mortgages, offer fixed rates, which remain unchanged over time, credit card interest rates fluctuate. “If you carry a balance from month to month on a credit card, higher rates make it more expensive to do so. And because it’s more costly, it may be more difficult to get your balances paid down,” adds Renter.

Coping with Inflation

Part of the surge in credit card debt is attributed to inflation. “If you put the same items on your credit card this week as you did two years ago, it will result in more debt because prices are higher,” explains Renter. However, she clarifies that some households may rely on credit cards to cope with increased prices or other financial pressures. “Whatever the cause, higher debt carried for longer is more expensive debt, particularly when interest rates are higher,” warns Renter.

A Safety Net for Hard Times

If you need more clarification about your credit card’s interest rate, the simplest way to find out is by checking your monthly statement. “If you don’t get a paper statement in the mail, download or view it online. From there, you can use a credit card interest calculator online to see how your rate impacts how much you pay in interest each month,” advises Renter. Remember, paying off your credit card balance each month can typically avoid interest altogether.

It’s important to note, Renter emphasizes, that some people turn to their credit cards as a source of emergency funds, mainly when their savings are depleted or unexpected expenses arise. “While having an emergency fund in place is a worthwhile goal, don’t beat yourself up if you take on debt during an economic hardship,” Renter adds. “If you’re in over your head, a certified nonprofit credit counselor can help you create a debt management plan.”

In today’s financial landscape, staying informed about your credit card interest rates and effectively managing your debt has never been more critical. As interest rates continue to rise, being proactive and making informed financial decisions is vital to securing your financial future.

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