A life raft can occasionally resemble a credit card in appearance.
Americans are struggling to keep up with daily expenses and are increasingly depending on credit cards to stay afloat in an economy that has created the greatest inflation rate since the early 1980s.
According to a report from the Federal Reserve Bank of New York, credit card balances increased 13% in the second quarter of 2022 amid a sharp spike in the cost of living, marking the highest year-over-year increase in more than 20 years.
Back at $890 billion, total credit card debt is just shy of 2019’s record high.
“Many have to rely on credit cards to pay for basic necessities, especially with inflation pushing prices so high,” stated Allen Amadin, American Consumer Credit Counseling’s president and Chief Executive Officer.
According to TransUnion’s most recent credit industry insights report, the number of persons using credit cards and personal loans also increased to all-time highs in the second quarter.
Interest rates on credit cards are almost at record levels
A balance from month to month will soon cost much more than it does now because the Federal Reserve is acting aggressively to control inflation, including by raising interest rates, which boosts the cost of borrowing money in order to discourage spending.
There is a direct link to the Fed’s benchmark because the majority of credit cards have a variable interest rate. The prime rate and credit card rates increase in tandem with an increase in the federal funds rate. The effect is often felt by cardholders within a billing cycle or two.
The typical interest rate on a credit card is currently slightly over 17%, which is much higher than the rate on almost every other consumer loan. By the end of the year, rates could reach as high as 19%, which would be a record-high.
It’s “critical to financial health” to reduce balances
“Reducing credit card debt is always crucial to financial health,” Amadin said. “However, now more than ever it is critical for Americans to survive day-to-day costs of living and still be able to put money aside for savings.”
Here are his top three suggestions for finally eliminating credit card debt.
- Create a budget: To begin with, using a worksheet or online tool will help you understand where your money is going and how to more effectively allocate it. This will also assist you in determining the ongoing costs that might be diverting funds from your long-term objectives.
- Pay more than the minimum required: Making on-time payments on your credit cards will help you avoid late fees and penalties. However, don’t just make the minimum payment because that won’t help you avoid paying a much in interest on the remaining balance. You can only minimize your monthly interest payments and move closer to your objective by paying more than the minimum.
- Spend less: When attempting to pay off debt, be sure to put a stop to any unnecessary expenditures like streaming subscriptions, dining out, or impulsive purchases. You can stick to your budget, stop adding to your revolving balance, and pay off more debt by reducing those expenses.