We all know how dangerous credit cards can be. They lure you in with seductive offers, and then -- if you're not careful -- you can get hooked, and end up in a spiral of debt. It gets scarier when people have multiple credit cards that they're juggling... and with that in mind, America probably has too many credit cards.
To be more precise: America has 323 million credit cards, according to the American Bankers Association's (ABA) Credit Card Market Monitor. That's almost one for every person -- I'm including children in that calculation, by the way -- in the United States. And it's about 1.3 credit cards per adult. It's also the largest number of credit cards open in the U.S. since the Great Recession began, reflecting a 5.8% increase in accounts year over year.
The use of debt in and of itself isn't necessarily a bad thing. And there's plenty in the report to both cheer and concern anyone worried about America's savings.
What we know
A lot of that growth came from 23 million new credit cards issued to subprime consumers, or folks with a credit score under 680. Lenders consider them to be a higher risk, and so they usually face higher interest rates and fees.
The ABA divides credit card holders into three categories: "Transactors," who pay off their balance each month, "Revolvers," who carry balances, and "Dormants," who aren't currently using their credit cards.
Unfortunately, Revolvers outnumber Transactors substantially: Revolvers represented 42.1% of accounts, while Transactors represented 29.7%. Both Transactors and Revolvers saw growth increase 0.3 percentage points and 0.4 percentage points, respectively. The Revolvers are costing themselves a significant amount of extra money by carrying their balances and accruing interest on them. On the flip side, at least the amount the Revolvers owe on their credit cards is relatively low -- 5.4% of their disposable income (income after taxes and savings).
Here's what it means for you
This survey highlights to me that we, as a country, need to do better about managing debt. Too many people are carrying balances on their credit cards, at a typical interest rate of 11.19%. If a person has $10,000 in credit card debt at that 11.19% annual rate, and pays it off at the rate of $250 per month, it'll take them 51 months to retire that debt -- for a total cost of $12,750. (To work the math yourself, check out our calculators page.) That's $2,750 in interest payments you had to make just to get that debt paid off.
If you find yourself in the situation above, consider cutting expenses and putting that extra cash to work paying down your debt more quickly. This is easier said than done, I know -- but we have a list of easy-budget tricks and a step-by-step guide to saving money that can help. Consider what happens if you double the monthly payment I mentioned above, to $500: It will only take 23 months to retire the debt, and for a total cost of $11,500 -- that's $1,250 in interest payments saved compared to the $250-per-month example.
That extra money can be turned to paying off lower-interest debt, or put in a rainy-day fund so the next time your car breaks down you don't have to take out a loan. And given that a majority of American households would have trouble handling a sudden $1,000 expense, you can see the need for that extra cushion.
Bottom line: You want to get things in order so the ABA classifies you as a Transactor -- someone who pays off any credit card each month. Credit card rewards points can be pretty awesome -- but only if you aren't paying for them with high interest charges.
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