Credit Card Debt Falls, but Bankrate's Ted Rossman Says It's No Time to Cheer

Wall Street economists breathed a sigh of relief last week when the Federal Reserve Bank of New York's report on household debt in the first quarter disclosed a 2% drop in credit card balances, falling by $29 billion. These folks have grown cautious examining Americans' near-record-level revolving debt, $1,282 trillion in the first quarter, worried they lack the assets to pay their bills. This can signal economic stress that precedes a recession.

Total household debt still rose by $167 billion in the quarter, reaching $18.2 trillion. Housing, auto loans and student loans contributed to the total, highlighting major challenges in maintaining a healthy economy. Student loans pose the most troubling obstacle to prosperity right now, with President Donald Trump restarting payment requirements.

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Bankrate senior industry analyst Ted Rossman warned economists to tread lightly after the report, noting that credit card balances "almost always fall in the first quarter, because people go on this post-holiday spending detox." He explained that borrowers often make New Year’s resolutions to "spend less, save more, pay off debt" and "use tax refund money to pay off debt." However, balances "almost always rise in the second and third quarters" and "really spike in the fourth quarter."

Credit card usage has skyrocketed since the pandemic, jumping 54% in the last four years. Fortunately, benign reasons may be responsible for at least part of the surge. A tech-savvy generation has popularized germfree electronic transactions since COVID, disrupting formerly cash-heavy venues like supermarkets, pharmacies and transportation. Even so, stressed-out Americans trying to make ends meet are playing a major role in the debt spike.

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According to Rossman, about half of Americans now pay off their credit card balances each month, avoiding interest rates that average above 20%. This crowd is less profitable for Visa V, Mastercard MA and other payment processors, accessing lucrative perks that include travel points and cashback programs. Those who don't pay their balances each month assume the burden, stuck with high interest rates to compensate for more affluent or disciplined customers.

Credit card borrowers under economic stress are climbing a very tall hill because the average balance is now approaching $6,000 per month. When they don't pay their balances, the ‘minimum payment' becomes a lucrative trap for card processors, taking an average 18 or more years for borrowers with a 20% interest rate to close out the debt. It will also incur nearly $10,000 in interest payments.

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Borrowers are seeking help at increasingly alarming rates. Nonprofit credit counseling leader Money Management International reported a 35% spike in new clients last year, fueled by young adults – especially single men – facing the reality of loans under default. In addition to outside assistance, Rossman suggests looking for a 0% balance transfer card. These are special cards offered by large institutions that feature 0% or ultralow introductory rates for a specified period that can last up to two years.

Just make sure to pay off your balance before the clock runs out, or you'll find yourself underwater once again.

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