AYESHA RASCOE, HOST:
It's a bad time to have credit card debt. High inflation has pushed the Federal Reserve to raise interest rates to their highest levels since 2006. For those with credit cards, that means missing a payment is getting more expensive, way more expensive. And right now, Americans hold a lot of credit card debt, almost a trillion dollars - that's trillion with a T. Ted Rossman is a credit card senior industry analyst for Bankrate. He's here to help us make sense of these numbers and provide some tips to manage credit card debt. Welcome to the program.
TED ROSSMAN: Thank you for having me.
RASCOE: Ok. So, you know, help us put this huge number - almost $1 trillion - into perspective. Is it missed credit card payments accruing interest? Or is it the total balance of credit card bills or people, you know, just paying that minimum payment? Or is it both?
ROSSMAN: This $986 billion figure from the New York Fed is all credit card balances. So it includes bills that are paid in full at the end of the month. Our data shows that about 54% of credit card holders typically pay in full at the end of the month. The other 46% carry debt. The average credit card charges a record high, 20.49%. And some cards are even in the 25 or 30% range. So if you have credit card debt - no shame - a lot of people do - but we really want to come up with a plan to pay that down.
RASCOE: So, I mean, what role is inflation playing with credit cards and consumer spending? Like, are we putting more of our expenses on credit cards than we used to?
ROSSMAN: Anecdotally, we are hearing about a lot more people financing day-to-day essentials. We see it on credit cards. We also see it with buy now, pay later services, where more people are financing gas and groceries and day-to-day essentials. And I think that's an especially tough spot to be in because if you don't have the money to pay it off right away, then the annual percentage rate could be 20% or more, and it can just trap people in this debt cycle. We found that 60% of people with credit card debt have had it for at least a year, and that's up 10 percentage points over the past year. I think that speaks to inflation and higher interest rates.
RASCOE: So, I mean, how do the interest rate hikes by the Fed affect the amount that banks charge for credit card interest? Like, what is the connection there?
ROSSMAN: So basically, when the Fed moves, your credit card rate moves. It affects new and existing balances, which is especially unfortunate for anybody with existing debt. For the most part, we're talking about credit card rates that are five percentage points higher than they were early last year. So it's definitely a big deal for people.
RASCOE: Is it safe to assume that banks are making a lot of money off of credit cards right now?
ROSSMAN: It's been kind of a have your cake and eat it too environment for card issuers of late because spending has picked up. More people are carrying balances. Actually, a record number of people opened a new credit card last year. And yet people are still paying these bills back on time, for the most part. The credit card world has been quite profitable, especially of late.
RASCOE: I mean, obviously, the basics are don't spend more than you make. People probably know that. But, you know, life happens. And then pay your balances on time. You know, pay it off each month. But, you know, what are some other tips that we could use to manage credit card debt? And I guess let's start with those who have a pretty good credit rating.
ROSSMAN: There are some things you can do. For example, if you have credit card debt, consider a 0% balance transfer credit card. These offers let you pause the interest clock for up to 21 months. So we're talking about rolling your existing high-cost debt into a newly opened card. The fact that they have these lengthy 0% periods could be a huge tailwind to help you get out of debt.
RASCOE: For those who are still working on their credit scores, what can they do?
ROSSMAN: If you have a lower credit score, maybe nonprofit credit counseling is a better way to go. Reputable agencies like Money Management International can negotiate better terms. Maybe they get your 20 or 30% credit card rate down to 7 or 8% over four or five years. And they can walk you through the process of paying it down. I would steer clear of the for-profit debt settlement companies because while they have a great pitch, which is get out of debt for pennies on the dollar, it trashes your credit because of the late payments. And settling for less than you owe is not a good thing, either. The minimum payment math is brutal. I mean, if you have the average credit card balance and you make minimum payments at the average rate, you're going to be in debt for 17 years, and you're going to incur many, many thousands of dollars in interest charges. So it's really important to come up with a plan.
RASCOE: That's Ted Rossman, credit card senior industry analyst for Bankrate. Thank you so much.
ROSSMAN: No problem. Thank you.
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