Consumers Dig Deeper in Debt as Inflation Prompts Credit Card Use for Daily Expenses

A man holds several credit cards in a 2009 file photo. Joe Raedle/Getty Images

Groceries, gas, and heating bills have gone up. As inflation grows, more consumers rely on credit cards to bridge the gap between income and expenses.

“It is the combination of inflation and an overall cost of living, which includes housing, that is driving people to lean more frequently on open lines of credit,” Bruce McClary, spokesman for the National Foundation for Credit Counseling (NFCC), told The Epoch Times.

When consumers start to use credit cards to fill in for basic expenses, it may seem like a solution, he said, but the fix is only temporary.

“The cost of borrowing itself adds to the financial pressure because interest rates are so high right now. People who are running out of room in their budget to meet basic living expenses are then finding themselves using lines of credit to fill in the gaps. But then, those lines of credit that they’re relying upon, are adding to the financial pressure that they’re trying to escape,“ he said. ”This terrible cycle drives people further into what later could become unmanageable debt.”

NFCC is a nonprofit financial counseling organization that helps people connect with local nonprofit credit counseling services to overcome their financial struggles. Services are often free or offered at a reduced rate. Credit counseling is usually mandatory before consumers file bankruptcy, but consumers can seek credit counseling anytime for help turning around mounting debt.

The average household carries $7,000 in credit card debt, McClary said, but some have more.

“We do see people with $10,000, $20,000, $30,000 just in credit card debt, and their interest rates are sky high right now,” McClary said. “The average interest rate for consumers right now who are looking for credit cards in the market, is around 20 percent. That’s about as high as I’ve ever seen it as an average.”

Credit card interest rates are variable and tied to Federal Reserve interest rates. In fourth quarter of 2021, the average credit card interest was 14.5 percent. By the fourth quarter of 2022, the average was 19.1 percent.

Other factors that influence the interest rate are related to how the consumer manages their accounts, McClary said. Missing a payment may cause an interest rate increase on the account, and credit health is considered when determining interest rates.

Deeper in Debt

Nationally, credit card balances increased $61 billion in the fourth quarter of 2022, reaching $986 billion and surpassing the pre-pandemic high of $927 billion, according to the Federal Reserve quarterly report on Household Debt and Credit.

But indications are that consumers are struggling to pay the bills.

The bank charge-off rate for credit cards had trended up from 1.64 percent in the fourth quarter of 2021 to 2.55 percent in the fourth quarter of 2022, Federal Reserve data shows. A charge-off means the creditor has counted the account as a loss. However, the consumer is still responsible for paying the debt. It will show on a credit report until the debt is settled.

“We’ve seen more people reaching out for help than we did a year ago. The number of people who are in financial distress and are reaching out has increased. The other trend that coincides with that is, the proportion of those people who are reaching out who are in extreme financial crisis has also increased,” McClary said, adding that more consumers seeking credit counseling are in more severe circumstances than in previous years. “There’s a greater portion of the people who are reaching out who are very stressed out as a result of their extreme financial circumstances. Many of them say that they’re at the end of their rope, they feel like they’ve run out of options, and that there’s no hope. There’s a lot of despair and a lot of stress out there. And it doesn’t seem to be subsiding.”

Asking for Help

Consumers drowning in debt tend to wait too long before addressing debt, McClary said. Often it is after a few missed payments or a serious call from a debt collector outlining the consequences of not getting the account back on track that will shock a consumer into asking for help through credit counseling.

“In many cases, people are not reaching out proactively. I think that that’s a byproduct of their optimism, that things might somehow change—their circumstances may somehow self-correct, and that they'll get back on track. Sometimes it’s that optimism, or the fear of facing the reality of their circumstances, that keeps people from being proactive and ends up leading to a situation where they’re already past due and they find themselves scrambling to find help.”

While there are resources to help consumers get control of their debt, many become desperate and are vulnerable to scams that prey on these financial situations.

Those with steep debt can try talking directly the credit card issuer to see if there are more affordable ways to repay the debt. Those with good credit may qualify for better terms or a balance transfer to a card with a zero percent introductory rate. This can provide time to catch up or pay down debt faster and more affordably, easing pressure on the cardholder’s budget, McClary said.

Consumers may reach out to a credit counseling agency where a counselor may recommend a debt management plan.

“A debt management plan administered by a nonprofit credit counseling agency allows you to benefit from reduced interest rates, reduced fees, and the repackaging of your payments so that they’re more affordable and fit within your budget, which then gives you the ability to pay off your debt more affordably in a shorter amount of time than you would be able to in your current circumstances,” McClary said.

“If you enroll in one of those programs, you’re supposed to stop using those credit cards that are enrolled, because they are closed when they go in the program. That helps you pay down the debt and stop adding to it. But the benefit there is that you also have access to the expert advice from a nonprofit credit counselor through the duration of your program to help you adjust your budget to accommodate for emergencies, to prioritize savings, to check on the progress of paying down debt.”