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Americans owe a record $1 trillion in credit card debt

Credit card debt hit $1 trillion for the first time on record, according to new data, a troubling development as interest rates and delinquencies also rise.

Total balances on credit cards and other revolving accounts reached $1 trillion the week of July 26, up from $998 billion the prior week, the Federal Reserve Bank of St. Louis reported Friday.

That’s the highest level on record and $193.4 billion more than the start of the year and $264 billion above the $736 billion in April 2021, the lowest level since the onset of the pandemic.

The increase in indebtedness comes as interest rates on credit cards remain near 40-year highs and delinquencies, especially among younger borrowers, increase. And with the federal student loan forbearance set to end this fall, millions of Americans may find themselves relying on credit even more.

"Consumers are going to have to resume their payments of federal student loans soon," VantageScore President and CEO Silvio Tavares told Yahoo Finance. "The problem is that if they haven't had to pay a loan for three years, a lot of people don’t have that money in their budget."

'People are losing sleep over their financial situation'

Younger generations and folks with lower income levels are more likely to experience delinquency or borrow more over the next year, several reports found.

In fact, some are already struggling to keep up with payments as they contend with rising rates, piling debt and ever-present inflation concerns.

According to the New York Fed, the youngest Americans (18 to 29) had the highest credit card delinquency rates in the first quarter of 2023. At least 8.5% were at risk of slipping 90+ days behind on payments. This was followed by 30 to 39 year olds, which had a delinquency rate of 6.1%, while those 40 and up carried delinquency rates below 5%.

An air traveler uses a credit card to pay for items at a retail shop in John F. Kennedy International Airport in New York City. (Credit: Robert Nickelsberg/Getty Images)
An air traveler uses a credit card to pay for items at a retail shop in John F. Kennedy International Airport in New York City. (Credit: Robert Nickelsberg/Getty Images) (Robert Nickelsberg via Getty Images)

Overall, consumers flow into serious delinquency increased to 4.57% within the first three months of the year, up from 3.04% a year ago. Delinquency transition rates for credit cards also increased by 0.6%, surpassing pre-pandemic levels, the New York Fed found.

The New York Fed is scheduled to release its second quarter data on household finances on Tuesday.

In a separate survey conducted in June, 53% of millennials and 41% of Gen Zers felt they were more reliant on credit cards than ever before. The poll by Quicken Inc., which consisted of 1,002 US adults, found that 39% of Americans were living paycheck to paycheck with "no end in sight."

According to LendingTree chief credit analyst Matt Schulz, these borrowers have to act fast before rates tick even higher.

"People are losing sleep over their financial situation," Schulz said in a statement. "Cardholders' best move is to assume that rates will continue to rise and use that as further motivation to continue to knock down their credit card debt."

Interest rates continue to inch higher

Worsening folks' ability to pay off their piling credit card debt are rising interest rates.

Rates on credit cards have been driven to record highs by the Fed’s relentless campaign to cool inflation. In July, the central bank raised its key lending rate for the 11th time since March 2022. The quarter-point increase put the benchmark rate at 5% to 5.25% – its highest level in 22 years.

Read more: What the Fed rate hike means for bank accounts, CDs, loans, and credit cards

Those sharp upticks in the federal funds rate have trickled down to credit card APRs. The average credit card interest rate in the US as of Aug. 2 was 20.53% – the highest level since 1985, according to Bankrate. The Fed’s latest rate hike is expected to filter down to credit card rates within the next 30-45 days.

Translating that to dollars, a higher rate tacks on quite a bit to your monthly credit card payment.

For instance, someone with $5,000 credit card debt on a card with 20.53% APR and a $250 monthly payment, would pay $1,172 in interest and take 25 months to pay off the balance. By contrast, the same borrower a year ago with a rate of 17.01% would pay $921 in interest, and it would take 24 months to pay off the debt.

"In normal times, given that most Americans' financial margin for error is tiny, that’s a big deal," Schulz wrote. "However, these aren’t normal times, so those savings are even more important."

Plan ahead before student loan repayment resumes

With the end of student loan forbearance just around the corner, credit card borrowers may face yet another bite out of their budgets, making it tougher to pay off existing debts or creating a situation where they need to lean on debt more.

According to Experian, the average borrower could be facing a monthly payment of $203 once student loan payments resume. Out of all generations, younger adults have the most outstanding loan debt.

Read more: Worried about when student loan repayments resume? These programs could help

That’s why before payments resume, borrowers who also carry credit card debt should make a plan to budget each month, Schulz noted. They could also seek alternatives to lower their credit card interest rate — such as applying for a zero-interest balance transfer card.

According to LendingTree, at least 76% of cardholders who asked for a lower APR for their credit card in the past year got one. The average reduction was roughly 6 percentage points, which could save $500 or more depending on how much debt you carry.

A 0% balance transfer card also could allow you to go up to 21 months without accruing interest. That could be a bit of relief for folks who are also managing student loan repayments.

"The fact that card issuers are still willing to give breaks like that, even in the wake of a year of frequent rate hikes, is very, very good news for cardholders," Schulz said. "However you slice it, it is well worth your time to make that call."

Gabriella Cruz-Martinez is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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