US Credit Card Debt Passes $1 Trillion Dollars
With a strange economy, a wild stock market, and confused consumers deciding which move they should make next, it's not very surprising that credit card debt has hit an all-time record high. As of right now, US credit card debt is sitting at over 1 Trillion dollars and growing. Just to be clear, this isn't a call for alarm or something that just happened overnight.
Obvious factors such as the increased costs for consumer goods, a continual general growth in population, and a higher number of credit cards in distribution means that the amount of money owed to lenders will almost always be growing. Regardless, this giant number - 1,000,000,000.00 dollars - truly is an authentically massive amount of money. For some of us, it's also something interesting to think about.
How did we get to this point? What does it actually mean? Is it good, is it bad, or is it just business as usual? It's not very easy to understand and it's not easy to explain.
Why is Consumer Credit Card Debt So High?
In 2020, we were all thrown off-balance by a global pandemic that brought many industries and individuals to a complete stop financially. While some are still trying recover over 3 years later, others never felt much of a sting. A significant amount - especially when talking about businesses, both large and small - couldn't hold themselves together.
The sudden halt in movement, mandatory lockdowns in some areas, the closure of businesses, and the inability to work caused major problems for the flow of money. While the stock markets faired quite well and held up, the average individual or family was at a huge loss.
Unable to work, unsure of what the future would bring, and rightfully concerned for their health, a large percentage began to make compulsive purchases for supplies and emergency items. A lot of this spending went right onto credit cards. At the same time that this was happening, state and federal governments rolled out their safety nets and began ramping up aid to the needy, the unemployed, and an array of businesses who faced complete failure due to the inability to operate.
By mid-summer as payments were consistently reaching those who had been forced into unemployment or underemployment as a result of safety concerns, a large chunk of people found themselves with excess cash. It turns out that while we all need money to survive, we were spending a lot less on things like travels, vacations, and generally compulsive purchases.
All of these little costs add up. For example, a stop at a boutique while passing through town, breakfast and coffee at the drive-thru while on the way to work, and even planned events like family outings, dinner dates, or a night out at the bar.
Restaurants were closed. Hair and nail salons weren't in operation. Casinos, bars, clothing stores, cafes, construction companies, schools, and even many automotive dealers had locked their doors. In short, less spending resulted in some people seeing excess savings thanks to government assistance. They then utilized that to help pay down their credit card balances. The second, third, and fourth quarter of 2020 saw credit card debts shrinking at a rate larger than normal, and it's clear that there's a big connection there.
By the end of Q2 (the second quarter) of 2020, consumers had reduced their credit card debt by a whopping 311% over Q1 (the first quarter) and an almost unreal 582% compared to the same period just 2 years prior (Q2 of 2018). Despite all craziness of the pandemic, the average person was really gaining some traction on pushing down their card balances. The situation had many people feeling good about their ability to relieve themselves of their debts, which was a much-needed achievement for a society under the stress of a pandemic. Needless to say, it's was rather short lived.
At the end of 2022, the year-over-year debt had risen by 235% and by 202% compared to 2 years prior. In fact, Q2 of 2022 (just two years after the unreal 582% reduction in debt) the numbers shot right back up by 432% increase in debt. The result of strong inflation, a wacky housing market, and continued issues with post-pandemic recovery, the goblin of credit card debt had once again began haunting people. Over the next 12 months - which puts us at the present day for the most part - we're seeing reports that credit card debts are "rising by billions of dollars at the worst time possible", as stated by NBC news in the image below (click the photo to read their article).
Many are finding themselves exactly where they were before and wondering how it happened. Back to work, making money, and re-entering that process with no credit card debt - yet here they are with high balances and continually increasing prices.
For a lot of people it was the simple fact that they returned to regular spending habits. However, with inflated prices, the debt grew even quicker. Others had simply been reliant on cash savings or assets, and are only recently using credit cards to supplement living expenses. There's a very mixed bag when it comes to reasoning but at the end of the day, that debt just keeps on climbing.
Rising Interest Rates Pushing Credit Card Balances Higher
Another important metric in this game of trying to smooth out the nation's inflation issues are interest rate hikes. While the FED battles to tame inflation through strategic methods, the elevated interest rates make credit card issuers able to raise their rates up to and over 20% interest. That puts a lot of cardholders in a struggle to where their minimum monthly payments really begin to grow if they're holding a balance and not actively paying it down.
This has also sparked a lot of delinquency in the credit card industry, making it impossible for some consumers to even meet their minimum monthly payments. That is not only a bad practice because they're putting their credit scores at risk and teetering on the edge of default, but it gives them less hope for a better financial future. Efforts to curb the growth of inflation naturally cause job markets to slow, and that isn't the best news in the world either - even if it's necessary for a soft-landing.
Making Responsible, Sustainable Credit Card Decisions
Where many of us find ourselves today is between a rock and a hard place, in a cycle that we may have escaped (or assumed we did) but are now repeating again. Smarter spending habits, understanding that we need to remain resilient until inflation is under control, and continuing to spend wisely while considering the future of the economy are all good ideas to employ right now. We need to be focusing on growth for the long-term, and the proper use of our money. The responsible use of our credit is critical. As we've said before, your credit report is the most important financial tool you have. It's not something you want to ruin or take for granted.
If you've found yourself deep into debt, the best thing you can do is make a plan to begin resolving it. Even if you're making all your payments on time you don't want to get trapped in the endless cycle of never-ending credit card debt. Sometimes we really don't have any other choice, but we have to do our best to maintain our financial health.
Seeing that the country as a whole is using their credit cards at a rate that's above and beyond average isn't a good sign. But it's not the case for everyone. There are a lot of individuals and families who maintain low balances, or who don't even use credit cards at all. There are also people who are new to credit and wish to grow and improve their scores so that they can enjoy a better quality of life thanks to less financial stress, and the ability to finance certain purchases as they see fit. If you fall into that category of being eager to improve your credit from ground zero, be sure you do your homework to avoid the common pitfalls. Think of your credit card as a potential tool for growth rather than cash in your pocket and act accordingly.
Credit Card Debt Will Continue To Grow
Yes, credit card debt will continue to grow - and that's not necessarily a bad thing. As we've stated before, lending is a business that's continually expanding. Eventually, we'll see that the trillion we've recently surpassed as nothing more than a number, although it's definitely a significant marker of financial history. Hopefully, at the same time, we'll see inflation returning to more acceptable numbers and a smoothing out of the financial woes that many people find themselves suffocating from. As time passes, we get a better understanding of how things work and are able to prepare, strategize, and ultimately handle anything that comes into our path.
The continued expansion of credit card debt doesn't sound like something to look forward to, but it's also not something to be fearful of. If you manage your own finances in a clever fashion, your part of overall statistic will be smaller than most people's. Furthermore, you'll be free to utilize your credit cards, your credit profile, and your credit score to make things happen in your favor instead of allowing them to become a struggle.
Be positive, be informed, and be a responsible user of your credit and you'll have nothing to worry about. The future of your credit is not about $1 Trillion dollars of debt, it's about how you manage what's available for you at any given moment in time. Spend smart out there!
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