During the financial crisis in 2008, people in different sectors of the U.S. economy were pointing fingers and looking for someone to blame. While it’s likely impossible to settle on one single cause of the crisis and following recession, there was a common theme: people living “outside of their means.” In this context, analysts were mostly referring to individuals and families who took on mortgages they couldn’t keep up with to buy houses they couldn’t afford.
People taking on debt to live a lavish lifestyle has been a perennial problem in the wealthy U.S. economy. And where debt is plentiful, lenders are happy to give out loans.
The problem only grew when the COVID-19 pandemic hit the U.S. in March 2020. As layoffs, furloughs, and business closures became widespread, many Americans realized they lacked the savings needed for a large financial crisis. Some had no choice but to charge necessary expenses on their credit cards or take out personal loans.
Borrowing already appeared to be an issue before COVID-19, but how bad is it now? How can Americans deep in credit card debt reduce their balances or pay them off? We have some of the answers for you below.
How bad is American credit card debt?
According to the Federal Reserve Bank of New York, U.S. credit card balances reached a whopping $986 billion in the fourth quarter of 2022, surpassing a pre-pandemic high of about $927 billion. In addition, total household debt rose to $16.90 trillion—a 2.4% increase from the previous quarter.
Other statistics show that the average American household owed $169,242 in debt as of December 2022. Some of these debts are the usual signs of American middle-class overspending. Mortgage debt makes up a significant part of this debt ($11.92 trillion). Next, come student loans ($1.6 trillion) and auto loans ($1.55 trillion).
While you can easily argue that debt numbers should be lower, it’s hard to deny that taking on a mortgage, auto loan, and a student loan can count as necessary expenses.
| Type of debt | Total owed by an average U.S. household with this debt | Total owed in the U.S. | Percentage change for total owed between 2021 and 2022 |
| Any type of debt* | $169,242 | $16.9 trillion | +7.83% |
| Credit cards (total)** | $18,054 | $1.11 trillion | +15.25% |
| Credit cards (revolving) | $7,919 | $488.12 billion | +32.64%*** |
| Mortgages | $227,188 | $11.92 trillion | +8.33% |
| Auto loans | $29,251 | $1.55 trillion | +6.06% |
| Student loans | $59,149 | $1.6 trillion | +1.19% |
What’s not necessary is credit card debt, which totals up to $1.11 trillion, or about $18,054 for the average American household. In many situations, this debt could have been avoidable. On top of that, credit card debt can be expensive to carry, with much higher interest rates than many other loans and a variety of penalties for late payments.
According to NerdWallet, the average American household will pay $1,380 in credit card interest this year. That money goes right into the pockets of credit card companies just for the privilege of carrying debt. That money could be going into savings accounts or anywhere else where it would be better spent.
The cost of this debt affects some credit card users much more than others. The American Bankers Association (ABA) identified three distinct types of credit card holders with unique approaches to their credit card debt:
Transactors:
On one hand, you have “transactors.” Transactors treat credit card spending like any other transaction and use them on a regular basis. But before any interest can be accrued, they pay off the balance in full. Transactors typically do this to build credit over time or earn credit card rewards.
Revolvers:
On the other hand, you have “revolvers.” This group is an attractive target for credit card companies since they tend to throw out a lot in interest over time. Revolvers carry some level of credit card debt month to month, often paying only their monthly minimums to keep the collections agencies at bay and remain afloat. Credit card companies collect the most money in interest from this group.
As mentioned earlier, these individuals often carry thousands of dollars in credit card debt every month. As a result, they pay tons in interest. These average costs, though, can vary widely depending on demographics, household income, and more.
Dormant:
A dormant account holder owns a credit card that they hardly use. Their account is open but mostly inactive.
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Who is affected most by American credit card debts?
Inflation hits low-income people the hardest. So, it’s no surprise that over half of households making under $50,000 (55%) carry balances from month to month, according to a recent Bankrate survey.
That number drops to 42% for households earning between $50,00 and $79,999, 40% for those making $80,000 to $99,999, and 37% for households earning $100,000 or more.
Another study reveals that Generation X has been carrying the most credit card debt. Data from New York Life found that Gen Xers owe $7,004 on average—a greater amount compared to that of baby boomers ($6,785), millennials ($5,928), and Generation Z ($2,876).
Is credit card debt on the rise?
Most projections indicate that American credit card debt is expected to continue rising in the next few years.
A decade ago, credit card debt sat around $668 billion dollars, and the number has only crept higher and higher. That rise hasn’t been steady, as credit card debt tends to dip slightly every year in the first quarter. However, the trend has been clear. And as mentioned previously, credit card debt reached $927 billion by the end of 2019.
This number then dropped in 2020 and 2021 as Americans used their stimulus money to pay off debt. However, balances have been on the uptick again. According to the Federal Reserve, U.S. credit card balances stood at $986 billion in the fourth quarter of 2022, surpassing the previous pre-pandemic record.
With debt rising this steadily and dramatically, you can expect to hear people blaming others for living outside of their means. While there’s certainly some truth to these accusations, that’s not the only reason debt continues to rise.
Another reason for rising debt is the pandemic and the inflation that followed. Meanwhile, salaries have been trailing behind the soaring prices of necessities like housing, groceries, and gas.
In fact, inflation hit an all-time high in June 2022 as consumer prices increased by 9.1% compared to the previous year—the biggest annual increase since 1981. As these costs grow while paychecks fail to keep up, Americans find themselves turning to credit cards and debt more often just to get by.
For example, those on the lower end of the income ladder may fall into debt when faced with financial hardship. If they were to be diagnosed with a chronic health condition requiring expensive treatment, they may not have the health insurance or savings to cover the costs. When the bills start to pile up and their savings account dries up, they are likely to rely on their credit card to get by.
After all, when the choice is between your physical health and your long-term financial well-being, the answer is easy. Add situations like these to the rising costs of education, housing, and other necessities, coupled with a less-than-stellar rate of income growth, and you can see why debt is likely to rise far into the future.
What can you do to avoid the dangers of rising debt?
If you’re worried about your long-term financial future, you should be concerned about the rising amounts of debt in American households, especially credit card debt.
In the big picture, rising amounts can be precursors to a deep financial recession. In late 2007, right before the financial crisis and the recession took place, credit card debt numbers were higher than normal, hovering around $839 billion.
Even if you were a financially responsible individual, there’s a good chance the recession affected you in some way. Similarly, numbers stood at a record-breaking amount shortly before the COVID-19 pandemic impacted the U.S. economy.
So how can you protect yourself from the dangers of inflation and rising debt? The most obvious solution is also the most difficult: pay off your debt and insulate yourself from its negative effects. That’s harder than it sounds, but it is possible.
Most financial professionals agree that the best way to become debt free in a responsible fashion is to strategize and commit yourself to paying off your debts. First, put away your credit cards and use cash whenever possible to stop accruing high balances.
Your next move should be paying more than you have to. Pick a debt you’d like to eliminate and focus on paying it down as quickly as possible. Paying more than the minimum amount each month can help you reduce the balance faster. It also enables you to save money since you’ll cut down on interest payments.
However, some people aren’t in a position to allocate extra funds toward paying down debt. They might already be living paycheck to paycheck without money left over at the end of the month to pay extra.
If this sounds like you, there are still a variety of solutions. By choosing debt consolidation, you can combine multiple unsecured debts into a single payment that often charges a lower interest rate.
If you’re interested in learning more about debt consolidation, National Debt Relief has helped over 500,000 nationwide pay off their debts and get a fresh start. Check out our reviews and get a free savings estimate today.
