Americans continued to pile on credit card debt this year, with total balances approaching $1 trillion sooner than some experts had expected.
US credit cardholders now owe $986 billion in debt, data from the Federal Reserve of New York found Monday. That’s $59 billion higher than the record set in the fourth quarter of 2019, when balances stood at $927 billion. It’s also the first time since 2001 in which credit card debt didn’t fall in the first quarter.
The uptick in credit card debt is a sign that some US households are being forced to lean on credit cards to meet basic monthly expenses as inflation and high interest rates diminish their savings.
Still, there are some ways consumers can use credit cards to their advantage, experts say, when used wisely.
“I’m not opposed to having a credit card, but you’ve got to be able to only use it within the context of a monthly budget,” Scott Inman, a GenWealth financial advisor, told Yahoo Finance Live (video above). “I think that’s what we’re finding here is that people are having a hard time paying their expenses within the context of where their income is.”
Credit cards are “not a piggy bank,” he added.
Although inflation has shown some signs of cooling, prices remain elevated.
Food prices are up 7.7% year over year in April. Meanwhile, the cost of transportation was up 11%, the Bureau of Labor Statistics said, and shelter was 8.1% higher.
“There’s no question that the current economic environment we’re in with inflation running as hot as it’s been for the last two years has caused people to be in more of a pinch than maybe they were before,” Inman said.
Still, credit cardholders should think twice before racking up debt. Overspending and falling behind on payments can be detrimental to credit scores. According to LendingTree, a missed payment could drop your score by as much as 180 points and stays on your credit report for up to 7 years.
“I understand that using a credit card may seem like a last resort, it may actually be that, but when it comes to credit card usage, we tell our clients to understand and be educated on how to use them wisely,” Inman said.
Credit cards, he added, are not “a place to spend money on vacation. It’s not a place to buy your next car or the next little toy, it should be a last resort to leave a balance on a credit card.”
Not paying off your balance can also snowball into unmanageable debt especially if the Fed continues to hike interest rates.
The average APR for all current credit cards increased to 20.09% in the first quarter of 2023, data from the Federal Reserve revealed, up from 19.07% in the fourth quarter. At the same time, APRs for cards accruing interest jumped to 20.92% from 20.40% in the fourth quarter of 2022.
Those are the highest rates the Fed has posted since it first began tracking the data in 1994, LendingTree Chief Credit Analyst Matt Schulz wrote.
“Of course, your best move is to make those interest rates a moot point by paying your card debt in full, but that’s often easier said than done,” Schulz wrote.
One way: transferring your debt to a 0% balance transfer card. With a 0% balance transfer card, borrowers can avoid paying interest on transferred balances for up to 21 months, depending on the card’s promotional terms. That said, credit card issuers typically charge between 3% to 5% of the balance for each transfer – which can add up.
“If you’re not able to effectively create a plan to [minimize credit card debt] in the near term, you’ve got to look at some 0% offers,” Inman said. “You’ve got to attack that credit card debt. Right now.”
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.