Credit card debt is reaching all-time highs, with Americans carrying an unprecedented amount of debt in their wallets. In the third quarter of 2020, total credit card balances surged to an eye-popping $1.08 trillion. This record-level balance represents a 22% jump compared to the same period last year, and is the highest balance ever, according to the Federal Reserve.
So, what’s behind the jump in credit card debt? In the past year, the pandemic has drained the wallets of many Americans, leaving them with few options for debt relief. Consumers are using their credit cards to bridge the gap between their income and expenses, in order to stay afloat during the pandemic.
The sharp decline in credit card spending in the early months of the pandemic was followed by a sharp increase in spending as the economy slowly began to reopen. With businesses reopening and consumers ready to spend, credit cards are the preferred payment method for many.
With historically low interest rates, some Americans are taking advantage of the opportunity to transfer their existing debt to a new card with a better rate. Additionally, many consumers are taking out new credit cards with attractive sign-up bonuses, which can be a great way to boost your credit score and increase your purchasing power.
However, while the availability of credit can be a blessing under the right circumstances, it can also be a curse. Taking on too much debt can be a financial burden, so consumers should use credit cards wisely and only spend within their means.
Finally, the sharp rise in credit card debt is not just limited to consumers. Small businesses have also been drawn to credit cards due to its access, speed, and in some cases, lower processing fees. As of this quarter, small business credit card debt is estimated at $85 billion, up 11% from the same period last year.
In the midst of a pandemic, credit cards have proven to be a powerful tool for Americans, offering access to financial resources during difficult times. However, the risks associated with increased credit card usage are real and should be kept in mind when using this form of payment. As we move into 2021, a renewed focus on budgeting, debt management, and responsible credit use will be key to avoiding financial strain for years to come.