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Credit card abuse can create difficult financial challenges for many Americans, but when handled responsibly, there are many rational justifications for using it.
Convenience and security are key incentives for consumers to pay with credit cards. They give people the ability to avoid carrying cash and are more secure than debit cards.
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Building a good credit score is important for a number of reasons, including large purchases like homes and cars.
Rewards programs for perks like cash back and travel can motivate many people to use credit cards.
Many credit cards also offer spending tracking features for budgeting and financial planning.
Some credit card holders are able to pay off their balances in full each month. Others pay the minimum due or some other amount, which carries over the debt and can add to it over long periods of time.
A look at the income differences between households with credit card debt and those without reveals a pattern.
Credit card debt and its relationship to household income
It turns out that families with credit card debt are concentrated in the middle of their income distribution.
The Federal Reserve Bank of St. Louis published some data explaining the details. The share of households with credit card debt was calculated by income decile, with the lowest income group being the first decile and the highest income group being the tenth decile.
“Households in the upper middle tier of the income distribution — those in the fifth, sixth, and seventh deciles — were the most likely to hold credit card debt,” the bank wrote in its report. On the economy Blog. “In fact, 60% of households in the 7th decile had credit card debt, compared to only 25% and 28% in the 1st and 10th deciles, respectively.”
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The bank notes that one explanation for this may be that households in the bottom decile may not have the established credit to qualify for credit cards, and may also not have access to banking services.
Households in higher income deciles are more likely to have the money and savings to pay off their credit card debt more quickly.
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Average balance for households with credit card debt
For a large number of people, payments on these balances are a significant financial burden each month.
Households with credit card balances were paying, on average, $180 per month on their credit card debt.
“The relatively high interest rate on this debt makes it an expensive form of borrowing,” the Reserve Bank wrote. “And if credit card interest rates continue to rise, your debt burden could become even greater.”
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The average total balance for an American household is about $7,226. A look at rising interest rates shows how this can become a problem.
In November 2021, the interest rate on credit card debt was 15%. That came out to $90 a month in interest.
In November 2023, the interest rate rose to about 21%. So the family now pays $126 a month in interest, and that doesn’t include paying back any of the principal.
“By comparison, interest rates on personal loans rose over the same period from about 9% to only 12%,” the bank wrote. “Households forced to take on more credit card debt to cover emergency expenses will see greater growth in their payments.”
“Households at the bottom of the income distribution have the most credit card debt relative to their income, making them the least willing to see their payments rise significantly.”
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