Debt Is Dragging Down American Consumers

In May, we reported on the rising level of credit card debt in the US after the Wall Street Journal reported that credit card balances are on track to hit $1 trillion this year.

Now we have evidence it might be even bleaker. A study released in June by CardHub reveals US consumers did worse than expected in the first quarter of 2016. And the study confirms that at this pace, by year-end, Americans will have accumulated more than $1 trillion in credit card debt.

According to the study, Americans paid off $26.8 billion in credit card charges through the first quarter. That represents just 38% of the $71 billion in debt added during 2015. It was the smallest Q1 debt reduction since 2008, falling almost 25% below the post-recession average.

There was even more bad news last month. According to a Kitco report, an increasing number of Americans can’t keep up with their payments:

Meanwhile, the bank card default rate increased in May, hitting a default rate of 3.11%, up from April’s 3.09% default rate, which marked the fifth consecutive month with an increase in bank card defaults, according to data from S&P Dow Jones Indices and Experian for the S&P/Experian Consumer Credit Default Indices.”

According to a report in the Mercury News, only 5% of US credit card holders pay their balances in full each month. And yet the credit card companies continue to issue new cards, even extending credit to subprime consumers.

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In fact, a recent study reported by Bloomberg revealed credit card companies actually target riskier, less educated consumers because they know they can make money off of them:

Some new research by economists Antoinette Schoar of the Massachusetts Institute of Technology and Hong Ru of Nanyang Technological University claims to find exactly such a result. The authors use data from a private company that tracks credit-card offers. They find that less educated consumers — who are likely to be less financially sophisticated — are more frequently given offers that include back-loaded costs. Those are plans that start with low rates, but increase later, with extra-high over-limit and late-payment fees. In other words, those are likely to be the borrowers who make bad financial decisions — racking up debt and eventually paying much more in interest. Meanwhile, more educated households tend not to be offered these plans.”

It’s easy to get lost in abstractions when talking about cumulative credit card debt, but consider its impact on individuals and families as reported by Forbes:

The average American household carries $15,762 of credit card debt according to data from Nerdwallet. The average credit card interest rate is 13.51%. That means the typical American family could be losing $2,000 a year to credit card interest alone.”

This puts a tremendous drag on the US economy. And it doesn’t even take into account the spiraling student loan debt.

According to a report issued in May, a record number of parents – more than 60% – say they are considering helping their kids pay off student loans, and this could ultimately put their retirements in jeopardy.

When you add student loan debt on top of credit card debt, you have a real recipe for disaster.

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