Increasing Numbers of Americans Getting Trapped in Credit Card Debt

A study says that credit cards often make the wealthy wealthier and those who are less fortunate more in debt. Spencer Platt/Getty Images

Rising prices and higher interest rates are trapping many Americans in expensive credit card debt, a new report states. 

According to a survey released Thursday by Bankrate, a financial analytics firm, 37 percent of American credit card holders have maxed out or nearly maxed out on their card limits since the Federal Reserve began raising interest rates in March 2022. 

“That’s probably higher than you would expect to see in an economy that has low and stable inflation,” Bankrate analyst Sarah Foster told The Epoch Times.

“I think this is just a sign that consumers are feeling some distress, and the nationwide aggregate numbers just might be masking what’s underneath the hood.”

According to the survey, more than half of the respondents who had gone deep into credit card debt blamed inflation, which has reduced the value of the U.S. dollar by more than 20 percent since 2021 and left many Americans struggling to afford basic necessities. The second reason, cited by 38 percent of respondents, was unexpected emergency expenses.

Aggregate U.S. labor data are generally positive. Unemployment, while edging up slightly over the past year, remains low at 4.1 percent as of September, according to the Bureau of Labor Statistics. Wage growth, while down from 2023, is 4.7 percent as of September, according to Fed statistics. 

But national averages don’t always capture the plight of those who are struggling. 

According to the Q4 2023 Quarterly Credit Industry Insights Report (CIIR) released in February by TransUnion, a credit-rating company, Americans’ credit card debt exceeded $1 trillion for the first time on record, and grew by 13 percent over the prior growth year.

And by contrast to more affluent Americans, who can draw on options like home equity for cash, those who must resort to credit cards will typically pay interest rates of almost 25 percent, according the LendingTree, a consumer finance company. Those high interest rates add to monthly card payments, making it even more difficult for those who have gone deeply into debt to climb back out of it.

In addition, those who max out on their credit cards also often see their credit scores decline, closing off other options to consolidate their debt at lower rates. 

According to Experian, a credit-rating company, a person’s credit-utilization ratio, or how much an individual has borrowed under available credit lines, comprises about 30 percent of a FICO credit score, a key measure used by banks and card companies to assess creditworthiness. Running up against card limits will often result in a substantial reduction of a person’s FICO score.

Lower FICO scores not only result in higher interest rates, they can also drive up other costs, like car insurance. People with poor credit pay on average $4,349 per year for a full coverage car insurance policy, compared to $2,348 for those with a good credit rating, Bankrate insurance analyst Shannon Martin told The Epoch Times. By comparison, a driver with a drunken driving arrest pays $4,557.

Concerns About Consumer Spending

Given that consumer spending comprises more than two-thirds of America’s GDP, indications of consumer distress can be a red flag for the economic health of the country.

“From the economic standpoint, if we already have this many Americans struggling to handle inflation—they’re tapping their credit cards and running out of options to finance essential expenses—that’s a pretty worrisome sign for the economy too,” Foster said. “We’re in the fourth quarter now and we’re approaching a crucial holiday shopping season.”

Typically, she said, when people max out on their credit cards it also indicates they are likely behind on paying other bills, such as heat, water, and electricity. 

An October report from BankruptcyWatch found that personal bankruptcy filings have increased significantly over the past three years.

“Chapter 7 filings—a lifeline for many struggling households—increased by 44.77 percent year over year,” the report stated, also noting an “unprecedented surge in Chapter 13 filings,” which are filed by individuals who hope to hold on to essential assets like their homes and cars, and which increased more than 21 percent year over year.

While personal bankruptcy filings are trending upward, they are still well below pre-pandemic levels, and BankruptcyWatch calls a relatively healthy employment market a “silver lining” for Americans.

However, current trends in bankruptcy filings suggest a return to pre-pandemic levels, the report states. 

Analysts say that some of the recent increase in bankruptcies is due to the fact that government payments following COVID-19 lockdowns have run out for many Americans.

Noting that “pandemic relief efforts have largely expired,” American Bankruptcy Institute executive director Amy Quackenboss stated in March 2023 that “debt loads are expanding as the prices of goods and services have gone up with inflation and the cost of borrowing continues to rise.”

However, an October 11 report by U.S. Bank takes a more positive view. 

“Coming into 2024, there were concerns about the consumer’s ability to maintain healthy spending levels,” Rob Haworth, senior investment strategy director at U.S. Bank Asset Management, stated in the report. “But that hasn’t happened.” 

Retail sales were up 2.3 percent for the three-month period ended in August and rose 2.1 percent from levels a year ago, the bank stated.

While crediting these spending levels to “a solid job market, low unemployment, and wage increases,” the bank noted that “one issue to watch is total U.S. credit card debt, which now tops $1 trillion, a record high.”

Coping With Credit Card Debt

Americans who can access cheaper credit lines, such as a home equity line of credit, should consider using them to pay down more expensive credit card debt.

For those who do not have access to cheaper alternatives, one way to improve credit scores is to ask your credit card company to increase the card limits, so long as that doesn’t lead to putting more debt on the card.

Higher credit scores can open up better debt options. 

Foster also suggests making multiple payments on your card each month to reduce the balance on the statement date. This is because utilization rates are typically calculated based on your most recent card statement, not your average outstanding balance, she said. 

Balance-transfer cards, which offer low introductory rates, could be a temporary solution that allows borrowers to avoid high interest payments for several months and can provide an opportunity to use that extra cash to pay down the balance before the higher rates kick in. 

But for those who have run out of alternatives, Foster said, “it’s probably a wise idea to consider looking into nonprofit credit-counseling services.”