The total amount of debt owed by US consumers has reached $11.91 trillion, with the average indebted household owing $15,355 in credit card debt alone, according to NerdWallets Annual American Household Credit Card Debt Study. As one of the most expensive types of debt, credit card debt costs consumers an average of $2,630 per year in interest, assuming an average APR of 18 percent.
Its alarming that household debt is on the rise, but its also important to recognize that not all debt is created equal, says Sean McQuay, NerdWallets Credit Card Associate. Under the right circumstances, mortgage, student and auto loan debt can be helpful in building a bright financial future. That said, its critical for Americans to understand their debt and recognize that certain types of debt are unnecessarily costly.
Total debt owed by US consumers
- $15,355 per household; $712 billion total
- $165,892 per household; $8.12 trillion total
- $26,530 per household; $1.03 trillion total
- $47,712 per household; $1.21 trillion total
- $129,579 per household; $11.91 trillion
The Why Behind Debt in the US
NerdWallets Annual American Household Credit Card Debt Statistics Study analyzes data from several sources, including the New York Federal Reserve and the US Census Bureau, as well as a study conducted online by Harris Poll commissioned by NerdWallet. Key findings include:
The cost of living is outpacing income growth. While median household income has grown 26 percent since 2003, household expenses have outpaced it significantly -- with medical costs growing by 51 percent and food and beverage prices increasing by 37 percent in that same span. Interest payments add up.
The average household already is paying a total of $6,658 in interest per year, which means that 9 percent of the average household income ($75,591) is being spent on interest alone. Credit card debt is particularly costly. The average American household with credit card debt could spend up to 44 years paying it down if only making the minimum payments each month.
A big part of getting out of debt is admitting you have a problem. Unfortunately, debt -- particularly credit card debt -- carries a stigma that can be very damaging and counterproductive, says McQuay. An online survey we commissioned Harris Poll to conduct found that 35 percent of Americans consider credit card debt to be the most embarrassing debt to tell others about having and 70 percent think there is a greater stigma around credit card debt than any other type of debt. If this stigma leads to avoidance and inaction, were in trouble. Americans need to come to terms with their debt and make an active plan to climb out of it.
Credit card debt costs the average US household more than $2,500 in interest per year, according to a November NerdWallet study of over 2,000 adults. That's more than 3 percent of the average household income - just for the privilege of carrying debt on a credit card. It's enough to pay for two months' rent in the US, based on average costs, according to Numbeo data.
If you've got better things to do with your money-building an emergency fund orsaving for retirement, for example-you can reduce or eliminate your credit cardinterest with these tips.
1. Transfer your balance to a 0 percent APR credit card.
One of the easiest ways to stop incurring credit card interest is to transfer your balance from your current card to one with a 0 percent introductory APR. You won't be charged interest on the transferred balance for a set period of time, usually 12 to 18 months. If you pay off the card before the 0 percent rate expires, you won't owe any interest on the amount you transferred.
However, you should aim to use a 0 percent card only if you can pay off the balance before the introductory rate ends. Some cards apply retroactive interest to your initial balance if it's not fully paid off when the 0 percent period ends.
It's easy to get caught up in the balance-transfer game-transferring your balance fromone 0 percent card to another, making only the minimum monthly payment, then repeating the process when the 0 percent period ends. But play the game too often, and you'll end up losing. Besides the possibility of retroactive interest, applying for credit cards in a short period of time affects your credit score. Hard inquiries to your credit-like those from applying for new cards-can hurt your score, especially ifyour credit history is short.
Get one 0 percent APR card, and make a plan to pay it off before the introductory rate expires.
2. Make frequent payments.
A 0 percent APR card is a great tool for reducing debt, but it isn't an option for everyone. Most 0 percent cards are available only to those with good or excellent credit, which doesn't help those with subpar credit scores. But you can reduce interest costs in other ways.
For starters, you can make more than one payment per month. For example, if you get paid twice a month, and you can afford to pay $500 a month on your credit card, then pay $250 each time you get your paycheck. Credit card interest accrues on your daily average balance; making payments more often will reduce the daily average balance and therefore the amount of interest you will pay.Say you have a balance of $5,000. If you make one payment of $500 on the 30th of the month (the due date), your average daily balance for the month is $4,983. Assuming an interest rate of 20 percent, you would accrue $81.92 in interest. If instead you made two $250 payments-one on the 15th and one on the 30th -you would accrue only$79.87in interest. This may not seem like a life-changing amount, but it can make a significant difference over time and with large balances.
3. Cut expenses and increase income.
Once you have a strategy for reducing or eliminating interest, you can focus on putting more money toward your debt on a monthly basis. There are two ways to do this: Make more money or spend less. If you can, do both. If that's not possible, work on whichever method makes the most sense for you.
To cut expenses, evaluate your current budget. Do you have any monthly expenses you don't need or value? Are there more affordable alternatives for some of your existing expenses? Challenge yourself to cut $100 from your budget the first month. Then try to beat your previous month's savings each subsequent month.
You can also try to make more money. If your employer pays by the hour, ask whether you can work overtime. If not, can you pick up a second (or third) job at night and on the weekends? You could also use a skill such as writing, carpentry, tutoring or design to earn money as a freelancer.
Other money-making options include selling homemade goods online or at your local farmers market or craft fair, or selling items you're no longer using. Maybe you have an extra room in your home that you can rent out on an accommodations website. As with cutting expenses, challenge yourself to make an extra $100 this month, and try to earn more next month.
Whether you cut expenses or increase income, it's critical that the extra money go toward your debt. Use the newfound cash to make extra payments on your highest-interest credit card balance. As with making multiple payments a month, your monthly savings may not seem significant, but they truly add up.
The bottom line: As your credit card balances decrease, you'll accrue less interest, so make debt payment a top financial priority. In the short term, reduce or eliminate interest by taking advantage of 0 percent offers, making multiple payments per month and freeing up money in your budget by making more, spending less or both.
Federal Reserve Chair Janet Yellen announced today that the Fed would raise interest rates by a quarter to a half a percentage point, after seven years at essentially zero. In fact, the last time the Fed raised interest rates was in 2006, before the iPhone came out and the Kardashians kidnapped the kountrys konsciousness via the E! Network.
For people looking to buy a real estate, this is not the best of news (nor is it the worst). For investors, time will tell (though the market was up more than 200 points following the announcement). But if you have any credit card debt, this much is certain: youre going to see your interest rates go up.
Most credit cards these days dont have fixed interest rates but instead favor variable interest rates, usually tied to the prime rate. That way credit card companies are allowed to raise themsomething that fixed-rate cards cant do after the Credit CARD Act of 2009. Since the prime rate is usually around 3% more than the Feds rate, cardholders are going to see a small jump.
But how fast will it happen and should you be worried?
NerdWallet.coms credit card expert Sean McQuay says credit card borrowers might have a small reprieve before the increase hits. Most banks will adjust on the next billing month, some next quarter, he told MONEY. For new cardholders, however, McQuay says the hike will be immediate.
Exactly how much this will affect you depends on how much you have borrowed on your credit card. Credit card interest rates are generally very highthe average is around 18%so a quarter of a point might not make much of a difference. Say youre on the hook for $5,000, for example, and interest rates go up 0.25%; the additional interest would only be around a dollar per month
NerdWallet has done the math and found that the average indebted American household can expect to spend an additional $125 in credit card interest over the next five years, McQuay says. While thats still real money, this shouldnt significantly impact your financial standing.
That figure assumes the current rate holds throughout the five-year period, but rates probably will continue to risealbeit slowlypinching your wallet further. Still, if you can pay down your balance now, youll be better off. High interest rates are never nice things to have in your life.
Read next: What the Feds Move Means for Mortgage Rates
One possible problem for consumers is denial. In fact, 70% say that credit card debt carries a greater stigma than other forms of debt, like a mortgage, and more than a third found carrying a balance to be embarrassing. Almost half of respondents said they would be less interested dating someone who happened to have credit debt.
People view credit card debt as a personal failing, says McQuay. It sends the signal that they are not able to manage finances, and finances, for better or worse, are the easiest way to gauge your success in life.
Perhaps thats why consumers and credit issuers have a very different picture of how big the problem is. Borrowers thought the total amount owed, in aggregate, was $415 billion less than the amount lenders said was owed, NerdWallet noted.
Break the Cycle
If youre someone who struggles with debt, how can you improve your standing? One way thats relevant now is to spend less during the holidays. In 2014, average debt levels rose by almost $1,000 from March to December. Come up with, and stick to, a budget.
Also make sure youre using the right tools.If you have a balance, check out MONEYs best credit cards for borrowing and use a better card to get your debt under control. The Chase Slate, for instance, will let you transfer your debt without a fee and then pay it off interest-free for 15 months.
By starring debt in the face, you might find it easier to manage.
Read Next: These Are the Best Credit Cards