Public Debt Burden Survey 2023

In the current inflationary economic environment, more American consumers have more credit card debt than ever before. The Federal Reserve Bank of New York said overall credit card balances remained at a record high of $986 billion from the fourth quarter of 2022 to the first quarter of 2023. And a whopping 35 percent of all American adults have some kind of credit card debt, according to a January 2023 Bankrate survey.

“We’re seeing a triple whammy when it comes to credit card debt,” says Ted Rossman, senior industry analyst at CreditCards.com. “More people are carrying this type of debt, the overall balance sheet is at an all-time high and credit card rates are higher than ever.”

Under normal circumstances, it is difficult for borrowers to manage large credit card balances, but when credit card interest rates rise, repayment becomes more difficult and expensive. Credit card interest rates rose in part as the Federal Reserve announced a quarter-point hike in the federal funds rate in May 2023, the tenth rate hike since March 2022. The other part is that big lenders like Bank of America, Chase, According to CreditCards.com’s weekly interest rate report, Discover and Barclaycard, as well as smaller lenders like USAA, WebBank and Regions, have started responding to the rise. rates in June.

In fact, the average credit card interest rate for newly opened cards is at an all-time high of 20.69% (at the time of writing).

“Credit card rates increased more in 2022 than in any other year on record,” says Rossman. “Even if rates level off from now on, borrowers will have to pay high interest rates.”

Huge debt plus higher annual interest rates challenge cardholders

Rates on new cards can be alarming, but on existing accounts they can be even worse. For example, the typical annual interest rate on Capital One’s range of card products for borrowers with fair credit has hovered around 29.99% since April, up from 26.99% last year.

Until last year, APRs in this range were extremely rare, but a growing number of general market credit cards are charging some cardholders more than many subprime credit cards.

Credit card debt in the country is terrible, as evidenced not only by the high total outstanding balance in the US and the record average interest rate, but also by how many more people have credit card debt. As evidence, according to a September 2022 CreditCards.com survey, six out of every 10 people with credit card debt are in debt for at least 12 months, up 50 percent from a year earlier.

US credit card balance is alarming

Another way to study credit card debt in the US is to look at the average outstanding balance on a card in each state. The following table shows the average credit card balance in each US state, as of March 2023 data from TransUnion, and how long it would take the average American to pay off their debt if they used 5 percent of their monthly household income.

It is important to note that the average balance in the country on bank cards was $5,719. However, the following 13 states and counties have averaged over $6,000:

However, the average credit card debt doesn’t tell the whole story when it comes to a person’s ability to manage payments. Income also matters.

“By comparing the average credit card balance with the average household income, this study aims to determine where credit card debt is harder to pay off and where it is harder,” says Rossman. “Mississippi, for example, has the sixth lowest average credit card balance, which sounds pretty good. But it has the lowest median household income of any state. Comparatively speaking, this makes it much more difficult to pay off credit card debt in Magnolia State.”

Rossman compares this scenario to a region like Washington, D.C., where the average resident has about $1,500 more credit card debt, but the median household income is more than $70,000 higher. The more a cardholder earns, the more opportunities they have to make larger payments and reduce their debt faster. Faster debt repayments also result in less money being spent on funding fees.

High Interest Credit Card Debt Repayment Strategies

The problem with credit card debt is that it tends to be permanent because interest accrues. The longer the debt remains outstanding, interest continues to accrue on balances that have already increased due to applicable fees. So while credit card debt is easy to get into, it’s hard to avoid when balances are high. Therefore, developing a plan to repay it is essential for good credit and financial health.

“My top tip is to sign up for a zero-interest balance transfer card,” says Rossman. “This allows you to avoid interest for up to 21 months.”

While zero interest APR balance transfer offers still typically include a balance transfer fee of 3 to 5 percent of the amount being transferred, with no interest charged on the new card over a set number of months, individuals with debt can come forward. .

For example, a $5,000 credit balance on a card with an annual interest rate of 29.00% would be worth $1,477 in total interest and would take 22 months to pay off if the cardholder consistently paid $300. If the cardholder transfers this debt to a card with an 18-month introductory offer of 0 percent APR and pays the same $300 payment each month, the debt will be paid off in 17 months. All of this will cost $150 with a 3% balance transfer fee. Not only will this method save the cardholder a staggering $1,326 in interest, it will also cut the repayment period by five months.

There are other strategies to explore, Rossman says. A personal loan can also be beneficial when the interest rate is lower than the combined credit card rates and some lenders do not charge a loan origination fee. With a personal loan, credit card debt will be repackaged into an installment loan, so payments will remain stable. Paying off credit card debt in this way can also help improve a borrower’s credit score, as installment loans are not included in the credit usage category in the FICO rating.

Another option is to work with a reputable non-profit credit counseling agency, as such agencies offer debt management plans. These programs can lower the interest rates on the cards included in the plan and are designed to help the consumer pay off debt in three to five years. Consumers can also look at their own finances and find ways to increase income and cut costs so they can increase their payments.

“Even though the Fed has pressed the pause button on its rate hike campaign, the cumulative effect is significant,” says Rossman. “It’s important to make debt repayment a priority.”

Bottom line

Since managing credit card debt is more expensive than ever month after month, anyone with card debt is advised to start dealing with it as soon as possible. In fact, Fed officials are predicting that the federal funds rate could increase by another half a percentage point this year, in which case cardholders likely won’t feel their interest relief. Anyone with card debt will do well if they apply one of the debt repayment strategies mentioned, such as consolidating debt on a balance transfer card or applying for an installment loan so as not to keep paying high interest.

Methodology

CreditCards.com calculated repayment times and interest payments using the average credit card balance (according to TransUnion) and median household income (courtesy of the US Census) in each state. CreditCards.com has estimated that 5 percent of gross monthly income will go toward paying off credit card debt. For the average credit card interest rate, CreditCards.com used 20.69 percent, the average low point of yearly ranges as measured by the site on 100 popular cards in early June 2023.