Record Level Credit Card Debt is Hurting Young People

We are sitting on a ticking time bomb - of ballooning credit card debt. Americans now owe a collective $1.13 trillion on their credit cards, according to a new report on US household debt by the Federal Reserve Bank of New York. This is the highest ever on record.

More than $400 billion of that was added in just the last 3 years alone. Look at this graph: 

According to the latest data, an average American household now owes more than $7,951 in credit card debt. 

So, if a household is paying 22% interest (the current average rate) on that debt - that’s an interest payment of about $1750 per annum! Yikes!

Add late payment fees, annual fees, or overdraft fees, and you are literally spending unnecessary money you didn’t even get to enjoy! That's no fun.

So, how did we end up in this situation? Let’s look at root causes and how to address them. 

What are the main causes of credit card debt?

Consumerism & Low Savings Rates

I know this isn’t a popular statement, but part of the problem is rampant consumerism and our not-so-sweet relationship with savings. Basically, we want our cake and eat it too.

On the one hand, youth are stressed about their finances, but on the other hand, many are living like they are financially free. According to the data, many millennials and Gen Zers are pulling in larger paychecks now, but they are also spending more on luxury items and travel. 

That euphoric feeling of revenge shopping or doom spending is overriding many young people’s ability to think long-term and save. 

In fact, 1 in 5 Americans has no emergency savings at all!

So, whenever an emergency or an unplanned expense occurs (because it always does), credit cards are bailing out most Americans. 34% of Americans have more credit card debt than emergency savings. 

Rising Costs & Inflation

On top of this, external factors like rising living costs and inflation are prompting Americans to increasingly rely on credit cards for basic necessities, like food and groceries. Data shows that about 1 in 3 U.S. consumers use credit cards to pay for groceries. 

Plus, as the U.S. federal government has removed most of the COVID-19 pandemic-era benefits - stimulus payments, higher food stamp benefits, pauses on student loan payments - households on a shoestring budget have been forced to rely on credit cards. 

What group is bearing the brunt of this credit card debt?

Young Americans are starting out with more credit card debt than other generations before them. This is due in part to rising food and shelter costs as well as student loan debt.

Because of this, this generation is more delinquent on payments and reliant on family for help. On top of this, 1 in 3 Americans ages 18 to 24 now has no income and is not in school, which is likely to exacerbate their current debt levels and have long lasting financial implications. 

A TransUnion report says Gen Zers are using credit cards more aggressively than millennials did at the same stage of life. The credit bureau found that 84% of 22- to 24-year-olds had a  credit card during the fourth quarter of 2023 in comparison to just 61% of 22- to 24-year-olds a decade earlier. 

How to avoid credit card debt? 

According to a Bankrate report, 44% of credit card users don't pay their dues in full every month. With skyrocketing interest rates and all the associated fees, you can quickly accumulate a mountain of debt that’s hard to overcome if you don't pay in full each month.

It’s straightforward, but the best way to avoid falling into a credit card debt trap is to pay your bills in full, every month.

To do this though, it starts with budgeting and tracking your transactions so you’ll know if you can repay it at the end of the month. At the end of the day, a credit card is a revolving loan (i.e borrowed money). It’s not a debit card! Before swiping, ask yourself, “can I repay the amount in full when the bill arrives?” If the answer is not a strong YES, you should probably prioritize your purchases.  

If you're rolling your eyes at us and telling us you can't realistically pay it off right now, we hear you! Try to pay as much as possible rather than paying only the minimum payment due. Even paying an extra 2-5% can help you avoid costly interest and clear your credit card debt faster than you imagine (see below). But make it your priority #1 to pay that credit card off first. 

How much should you put on a credit card?

A simple rule of thumb is to limit your credit card purchases to 30% of your total credit limit every month. So, if your credit limit is $1,000 per month, you should not put more than $300 (that is 30% of $1,000) on your card. 

This way, you’re also more likely to pay it off in FULL every month, which will boost your credit score - a three-digit number that reflects your creditworthiness.  

In conclusion, credit cards can be a net benefit for consumers if used responsibly and strategically. Do you want to learn more about how to make your credit card work for you? Watch this comprehensive lesson for more tips on how to use credit cards. 

This lesson is a small snippet of our 2-for-1 master course on personal finance for young people. Our 6-module course on smart financial strategies is designed to teach you how to manage your money and reduce debt more confidently. Enroll today to start controlling your finances - instead of the other way around!