Our trillion-dollar credit card bill
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What caused the rise in credit card debt?
There was this brief moment a couple years ago when it looked like Americans just might finally get their credit card spending in check. We were spending less during COVID and those federal stimulus checks meant a lot of us were actually making more money.
But then when those ended and inflation reared its ugly head and came back around, it really caught people off guard and they're digging themselves deeper and deeper into debt in order to make ends meet.
Over the past year and a half, as Americans were putting more on their credit cards than ever before, interest rates rose on those cards by nearly a third.
I could put all of my entire paycheck towards paying it off for the entire year, and it would still take me about two years to pay it all off. Plus interest.
Coming up on Today Explained, we're revisiting an episode from earlier this year about how Americans racked up over a trillion dollars in credit card debt and what it'll take to get out of it.
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It's Today Explained. I'm Jonquan Hill, filling in as host. And today we're talking to this guy.
I'm Nick Wolney, and I'm a managing editor at CNET and a finance journalist.
Nick's been following the rapid growth of credit card debt, talking to banks and credit card companies and regular people dealing with debt. And he says the first thing you've got to understand about credit cards right now is interest rates.
In Q1 of 2024, the Federal Reserve reported that the average credit card rate is 21.59%. This is a record high. We've been above 20% for a year. And for retail cards, Target, or you go to wherever it is, and I'm just trying to buy dish soap, and they're like, you know, do you want this card? Do you want the red card? You know, all those retail cards, those tend to have an average closer to 30%. And so in the moment, if someone is cash strapped or particularly there tends to be something like sign-on bonus or perhaps a credit, an opportunity to save some extra money in the moment, a lot of people will fall prey to that and not realize that they have this 30% interest charge that is accruing on this. And they just have this lagging credit card debt that persists as a result.
I wonder, do people understand what they're getting into when they get these high limit, high interest credit cards and then don't pay off their balance every month? Do people even realize that they're getting a high limit, high interest credit card?
I don't think so. When I interviewed a financial planner at Northwestern Mutual last year, she pointed out that her clients would regularly say, oh, I'm good. I'm making the minimum payment. I'm good. I'm paying my credit card. And she's like, no, that's the minimum payment. And these are the people who are probably more fiscally savvy if they've hired a financial advisor. If you've hired a financial advisor at Northwestern Mutual, you're probably at least thinking about your money and about your expenses and things like that. And those people are saying, oh, I'm good. I'm making the minimum payment. I'm good. It's quite hard to visualize how much something actually costs when you're just making these very, very small payments.
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