The American consumer has experienced a financial phenomenon in the third quarter of 2020. The amount of debt held in credit cards topped one trillion dollars for the first time ever, resulting in a record high of $1.08 trillion. The wave of spending from credit cards has been significant and this milestone has caused alarm among financial experts.
To understand the scope and impact of this trend, it is important to examine the factors that have contributed to the massive surge in credit card debt. First and foremost, the coronavirus pandemic has caused a severe economic downturn which has put a strain on incomes and employment. This has resulted in increased spending on credit cards to cover unexpected costs and emergencies. Additionally, the Federal Reserve announced a cut to interest rates in March, allowing consumers to make purchases on credit cards with lower rates and higher borrowing limits.
Another factor that is believed to have driven the surge in credit card balances is the use of cards for online purchases. Ecommerce is growing at an unprecedented rate as people take more precautions to avoid going out in public. Consumers are also exclusively utilizing contactless payments which, when combined with swiping of credit cards, make it easier and more convenient to make purchases this way. It is estimated that contactless payments accounted for half of all transactions in the third quarter.
It is clear that these unprecedented circumstances have made it easier for Americans to excessively rely on credit cards, resulting in the massive debt now seen in the current market. While the convenience of using credit cards is undeniable, it is important for consumers to understand the risks and repercussions that come with excessive debt. The danger of getting stuck in a cycle of debt can be minimized through budgeting and disciplined spending.
Financial experts have suggested that now is the time to be proactive and pay down debt before the next round of budget cuts. Bankruptcies and defaults are expected to rise as the full involvement of the economic downturn plays out, so it is crucial that card holders be prepared and start tackling their debt now.
In conclusion, the record-high level of credit card debt reached in the third quarter of 2020 can be attributed to the economic downturn caused by the coronavirus pandemic coupled with the use of contactless payments and lower interest rates. Credit cards can be a convenient way to fund purchases, but consumers must take caution and be aware of the repercussions of excessive credit card debt. Taking measures to pay down debt now is the best way to avoid further economic strain in the near future.
