Credit card debt rose by $17 billion in the third quarter

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Consumers have reduced the pandemic trend of paying down debt

After paying down credit card balances early in the COVID-19 pandemic, consumers are running up balances again.

A report by the Federal Reserve Bank of New York's Center for Microeconomic Data shows that total household debt increased by 1.9% -- or $286 billion -- to $15.24 trillion in the third quarter of 2021. The total debt balance is now $1.1 trillion higher than at the end of 2019. It is also $890 billion higher than in the third quarter of 2020, and $2.57 trillion higher than the peak seen in 2008. 

Reversal of trends

Part of the increase is due to the growth in mortgages. After all, the pandemic set off a homebuying spree in nearly every market in the country. Mortgage balances rose by $230 billion and stood at $10.67 trillion at the end of September. 

Credit card balances also stand out in the report. They increased by $17 billion, duplicating the increase in the second quarter. Balances are still lower than they were in 2019, but they are quickly catching up.

"We are again seeing credit card balances increase in the third quarter after a solid rise in the previous quarter," said Donghoon Lee, research officer at the New York Fed. "As pandemic relief efforts wind down, we are beginning to see the reversal of some of the credit card balance trends seen during the pandemic, namely reduced consumption and the paying down of balances.”

Pandemic conditions have influenced debt

Lee said the increase may not be all that surprising since pandemic restrictions are being lifted and consumption is increasing. Pandemic benefits such as enhanced unemployment benefits are also a factor, as they began to expire during that period.

In fact, all types of debt increased in the third quarter, with auto loans rising by $28 billion and student loan balances increasing by $14 billion. However, credit card debt concerns most personal finance experts because of the high interest rate it carries.

Consumers who get overextended on credit card debt have several options to help them get on the right track. Jestine, of Hope, Maine, got help from Cambridge Credit Counseling.

“Cambridge was super supportive and made me feel like I wasn't failing,” Jestine wrote in a ConsumerAffairs review. “I was happy with their ability to get the credit card companies to agree to 0% interest in exchange for closing the account. It was pretty seamless. They did credit counseling where they provided me with some tools, like budgeting, and I'm better equipped to not get into the situation I was in before again.”

Cash advances can be troublesome

Credit card debt is particularly troublesome when consumers use their cards to take out cash advances. The experts at myFICO say a credit card cash advance is among the most expensive loans and that it’s important to read the fine print.

One reason a cash advance is so expensive is because they typically start accumulating interest immediately. In contrast, interest charges don't usually kick in on purchase transactions until after a grace period.

Almost all credit card companies charge fees for cash advances. Fees are typically calculated as a percentage of the amount borrowed, usually ranging from 3% to 5%. A fee of 5% on a cash advance of $1,000 adds another $50 to the cost.

That said, there may be instances where a credit card cash advance is the better option. It’s less costly and easier to repay than a payday loan, for example. The experts at myFICO say it’s important to have a plan to repay the loan quickly and avoid ongoing high-interest payments.

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