The latest statistics from the U.S. Federal Reserve show that credit card balances have surged to a record high of $1.08 trillion in the third quarter of 2020. This marks an impressive 12.0% increase from the same quarter one year ago.
With the dramatic increase in credit card debt, many people are wondering what has caused the increase and what can be done to address the issue?
The rise in credit card debt can be attributed largely to lenders’ willingness to offer attractive debt management packages as well as longer term promotions such as 0% intro APR balance transfers. The increase in credit card debt can also be linked to consumer borrowing patterns. As credit became more widely available, consumers took advantage of the perks associated with credit cards, such as rewards, cash-back, and bonus points, and used them to purchase items they may not have otherwise been able to purchase.
In addition, the economic impact of the coronavirus pandemic has undoubtedly had an impact on credit card debt. With record numbers of Americans filing for unemployment due to the virus, many have had to rely more heavily (in some cases exclusively) on credit cards to cover their basic costs, such as rent and utilities.
With the outstanding debt figures still trending upwards, policy makers and consumers alike must be aware and take steps to minimize the risk associated with high credit card debt. Consumers should consider utilizing their existing cash reserves and savings accounts to reduce the amount of debt that must be carried on credit cards. Furthermore, credit cardholders should pay off the debt as quickly as possible to reduce fees, interest rates, and ultimately the overall balance.
Credit card lenders, meanwhile, must remain mindful of the risks associated with a rising level of debt. This includes ensuring that customers meet the lender’s criteria for approval and establishing reasonable interest rates and minimum payments. By doing so, lenders can play a critical role in managing the credit card debt of their customers.
Given the alarming levels of credit card debt, it is more important than ever to remain vigilant. Consistent and timely payments, along with proactive planning and responsible use of credit cards, can help consumers manage their debt responsibly and reduce their long-term costs.