A report by the Federal Reserve Bank of New York shows total credit card debt in the U.S. has reached $1 trillion for the first time.
Credit card balances surged by $45 billion in the second quarter of the year as more Americans apparently relied on expensive credit to make ends meet. That 4% increase pushed total indebtedness to the highest gross value in Fed data, extending back to 2003.
Another report – this one from the credit bureau TransUnion – shows many of the consumers running up large credit card balances are student loan borrowers, whose monthly payments have been on hold since April 2020.
Unfortunately for them, however, those payments are set to resume within weeks. In addition to resuming those loan payments, many will also have to find a way to pay their credit card bills.
The burden of additional debt
“The majority of consumers with a student loan have not been required to make payments for the better part of three years,” said Liz Pagel, senior vice president and consumer lending business leader at TransUnion. “Payment amounts will vary, but many of these consumers have taken on additional debt since the last time they had to pay their student loans. It’s important for both lenders and consumers to be prepared for this new payment shock.”
The TransUnion report shows that 53% of student loan borrowers, relieved of having to make loan payments during the last three years, opened new credit card accounts. Thirty-six percent also took out auto loans.
“These additional credit products mean additional monthly payments, the accumulation of which may pose added challenges for households attempting to reintegrate student loan payments into their monthly budget,” Pagel said.
While the Department of Education has offered a 12-month moratorium before student loan delinquencies will have an impact on consumer credit files, interest will begin to accrue immediately so Pagel says it is in the best interest of consumers to resume payments right away.
What to do
Faced with a tighter budget, many student loan borrowers may be tempted to make only the minimum payment on their credit card bill, but personal finance experts warn that’s a costly strategy, especially with interest rates north of 20%.
The quickest way to put a dent in your credit card balance is to apply for a balance transfer credit card that offers 12 to 20 months of 0% interest. That means the entire monthly payment goes to pay down the balance.
The ConsumerAffairs research team has analyzed current offerings and selected these seven balance transfer cards as among the best. All seven charge a balance transfer fee, but the fees charged by the Quicksilver from Capital One and SavorOne Rewards from Capital One may be the lowest.
Once the interest-free period ends, borrowers can pay off the remaining balance with a personal loan because rates are generally lower than credit card rates. Learn more about personal loans here.