Franklin Schneider, Wealth of Geeks
A new survey reports that 22% of U.S. credit card users are sinking deeper into debt each month — with credit card debt preventing many from reaching financial milestones, such as buying a home or building a retirement fund.
The findings come from a survey of 1,000 American credit card users by Clever Real Estate. The survey also reveals that 61% of U.S. card users are in credit card debt, carrying an average balance of $5,875.
As inflation forces consumers to spend more on essential goods, Americans report spending 30% of their take-home pay on their credit card bills in 2023. In short, credit card users are sacrificing long-term goals to afford short-term necessities. About 37% of card users say their credit card debt is preventing them from living the life they want.
Credit card debt is especially disruptive for Americans who want to achieve homeownership, an important wealth-building milestone that younger adults are already struggling to save for. More than four in five Americans have been in credit card debt at some point, and 22% of that group said credit card debt has prevented them from purchasing a home, leaving many to pay high rent prices without the benefit of building equity.
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How credit card debt is derailing homeownership
The financial perks of homeownership are well-known. As home prices have risen over the past decade, homeowners have gained about $100,000 in wealth since 2012, according to the National Association of Realtors.
But the extent of American credit card debt is locking out many would-be home buyers, despite financial incentives to help people invest in a home.
“Millennials are already taking longer to achieve homeownership than recent generations,” said Matt Brannon, data analyst and author of Clever’s report. “Now, they’re facing high mortgage rates and record credit card interest rates, making saving for a down payment that much harder.”
Brannon said the average millennial with credit card debt owes $6,794, the most of any generation. The study found millennials spend an average of $2,410 monthly on their cards. That’s about $600 more than the average monthly mortgage payment of $1,768. So, even if they could afford a down payment, many would need help maintaining their regular mortgage payments without falling even further behind financially.
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Credit card debt is stopping Americans from building savings
Homeownership isn’t the only priority Americans sacrifice to pay down credit card debt and make ends meet. About 47% of those with credit card debt say their debt has prevented them from building emergency savings. A similar share, 39%, say it has prevented them from saving for retirement.
Those findings are consistent with national trends. In fact, Federal Reserve data shows Americans are saving the lowest portion of their income since 2008. On average, Clever found that people without credit card debt have $2,000 more in savings than people with credit card debt.
Americans’ lack of savings can also be tied closely to the rising cost of basic living expenses. Clever’s survey found that two in three Americans say inflation is partially responsible for their credit card debt.
Consumers pay higher prices for goods, so they rely more on credit cards to cover the difference. About 48% of credit card users said they depend on their credit cards for essential living expenses like food, rent, and utilities.
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How rising interest rates make credit card debt worse
Meanwhile, to combat inflation, the Federal Reserve has raised interest rates to slow down consumer spending. But Americans behind on their credit card payments have been caught in the fiscal policy crossfire, facing high credit card interest rates.
Given today’s interest rates, Brannon said a person making minimum payments on a $3,000 debt would need almost 10 years to pay off the principal while accruing an added $4,000 interest.
That massive upcharge helps explain why 57% of credit card users reported concerns about the effects of rising interest rates on credit card debt. Once a consumer falls behind on scheduled payments, getting out of credit card debt is rarely a quick process.
The survey found 51% of those in credit card debt expect they’ll still be in debt one year from now. At the same time, the number of people missing payments is on the rise, according to Mary E. Hansen, an economics professor at American University.
“The worrying thing right now is that, for the first time since the pandemic, there has recently been an increase in the amount of credit card (users) entering delinquency, meaning that people are having a harder time paying off their debt.”
Clever’s report emphasizes that the pain of high credit card debt and interest rates won’t subside overnight. Consumers struggling with debt now will still feel repercussions in the future when trying to accomplish larger financial goals.
As Americans put more of their paychecks toward catching up on debt and affording essential goods, it’s becoming harder to put money away for important long-term priorities, such as a down payment, an emergency fund, or retirement savings. For many Americans, failing to achieve those financial goals would come with its own set of consequences.
