Why do people have so much credit card debt?
The higher cost of everything from housing to high-tops to haircuts are a major culprit. Although inflation has moderated since it peaked in June 2022, Americans—particularly lower-income families—are relying more on credit cards to cope with the sticker shock.
On an individual level, the overall average balance is around $6,501, per Experian's data. Other generations' credit card debt falls closer to that average or below. Here's the average amount of credit card debt Americans hold by age as of the third quarter of 2023, according to Experian.
$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month. However, you don't have to accept decades of credit card debt.
There are a couple ways credit card debt can damage your credit score: High balances: A major factor in your credit score is your credit utilization ratio (your credit card balances divided by their credit limits). Once this number gets above about 30%, it's bad for your credit.
Multiple cards yield multiple welcome offers, which can be worth hundreds of dollars each. You want to lower your credit utilization. Having multiple credit cards increases your overall credit line, which can lower your credit utilization rate if you keep your spending consistent.
Running up $50,000 in credit card debt is not impossible. About two million Americans do it every year. Paying off that bill?
Around 23% of Americans are debt free, according to the most recent data available from the Federal Reserve. That figure factors in every type of debt, from credit card balances and student loans to mortgages, car loans and more. The exact definition of debt free can vary, though, depending on whom you ask.
By the time you reach your 40s and 50s, debts should be lower or almost gone. Student loans should be non-existent, you may be paying for cars in cash, you might be pre-paying your mortgage, and credit card debt should not exist.
- Pay More Than the Minimum. ...
- Focus on High-Interest Debt First. ...
- Pay Off the Card With the Lowest Balance First. ...
- Review Your Expenses. ...
- Use Extra Cash to Pay Down Your Debt. ...
- Home Equity Loan. ...
- Personal Loan. ...
- Balance Transfer.
It will take 47 months to pay off $20,000 with payments of $600 per month, assuming the average credit card APR of around 18%. The time it takes to repay a balance depends on how often you make payments, how big your payments are and what the interest rate charged by the lender is.
What is healthy credit card debt?
The recommended ratio for credit cards is 10%. If your credit card payments alone are eating into a significant amount of your monthly income, it's a sign you have too much credit card debt. Making only the minimum payments each month: You can avoid late fees this way, but interest continues to accrue.
"Bad debt" is debt that doesn't provide something of ongoing value to the person who owes it, whether that's a place to live, a car to drive or an education. "Bad" just means it's debt that's best avoided if possible and, if you have it, should be the first debt you work on paying off.
What's considered too much debt is relative and varies by person based on the financial situation. There's no specific definition of “a lot of debt” — $10,000 might be a high amount of debt to one person, for example, but a very manageable debt for someone else.
How many credit cards is too many or too few? Credit scoring formulas don't punish you for having too many credit accounts, but you can have too few. Credit bureaus suggest that five or more accounts — which can be a mix of cards and loans — is a reasonable number to build toward over time.
That said, there are legitimate reasons to own more than two credit cards. Folks might open three credit cards to maximize rewards. For example, say a credit card offers cash back on grocery spending. Frequent travelers may also want a second travel credit card that gives points for booking flights.
If you pay off all your credit card accounts (not just the one you're canceling) to $0 before canceling your card, you can avoid a decrease in your credit score. Typically, leaving your credit card accounts open is the best option, even if you're not using them.
How Many Americans Are Living Paycheck to Paycheck? A 2023 survey conducted by Payroll.org highlighted that 78% of Americans live paycheck to paycheck, a 6% increase from the previous year. In other words, more than three-quarters of Americans struggle to save or invest after paying for their monthly expenses.
The minimum payment mindset
Here's how most people get trapped in credit card debt: You use your card for a purchase you can't afford or want to defer payment, and then you make only the minimum payment that month. Soon, you are in the habit of using your card to purchase things beyond your budget.
Try the avalanche method
If you want to get out of debt as quickly as possible, list your debts from the highest interest rate to the lowest. Make the minimum monthly payment on each, but throw all your extra cash at the highest interest debt.
Women are stereotypically seen as irresponsible spenders, but the data doesn't back this up. According to a 2019 Experian study, men carry more debt than women across nearly all categories, including credit card debt — the study found that men have $125 more in credit card debt than women on average.
How much debt is normal?
According to Experian, average total consumer household debt in 2023 is $104,215. That's up 11% from 2020, when average total consumer debt was $92,727.
Becoming debt-free can positively affect several aspects of your life and contribute to your long-term financial security and overall well-being. These benefits make being debt-free a worthwhile goal for many people.
Gen X (ages 43 to 58) not only carries the most debt on average of all the generations, but is also the debt leader in credit card and total non-mortgage debt.
“Shark Tank” investor Kevin O'Leary has said the ideal age to be debt-free is 45, especially if you want to retire by age 60. Being debt-free — including paying off your mortgage — by your mid-40s puts you on the early path toward success, O'Leary argued.
By most measurements, Gen X is deeper in debt than other generations. Members of Gen X — born roughly from 1965 to 1980 — have the highest average debt stemming from student loans, credit cards and more.
