Credit card debt has crept higher each year, and American consumers began the year 2020 carrying a whopping $1 trillion in credit card debt. However, given the unusual nature of spending during the COVID-19 pandemic, 2020 is on track to end with a decline in credit card debt.
In the third quarter of 2020, U.S. consumers paid back $73.1 billion of their credit card debt. The average card debt per household declined 14% compared to the same period in 2019, from $6,194 to $5,315.
The High Cost of Credit Card Debt
Carrying credit card debt can be expensive, especially on high balances. As interest rates creep higher, the cost of carrying credit card debt also increases. The majority of credit cards have a variable annual percentage rate, meaning the APR changes based on an underlying rate that’s indirectly tied to the Federal funds rate. Many credit cards use the prime rate as the index rate. Each time the Fed raises interest rates, credit card interest rates soon follow, typically rising by the same amount as the Federal funds rate increase.
The average credit card APR for Feb. 2021 was 20.28%, according to The Balance's ongoing analysis of credit card APRs.
Interest adds up quickly and varies depending on the size of payments made. A 16% APR translates into a total payment of $8,294 on a credit card balance of $5,000 if you pay only the minimum 2%, or $100, each month. That total decreases quite a bit to $6,391 if $300, 6% of the balance, is paid each month.
A Look at the Average Credit Card Debt by State
The average credit card debt varies by state. Experian ranked Alaska as the state whose residents held the most credit card debt—an average of $6,617. Iowa was the least indebted state with $4,289 average credit card debt.
It's well worth it to pay higher than the minimum to avoid interest accumulation on top of the original debt.
There are also some regional trends with average credit card debt. States in the Southeast and East Coast have a higher average credit card debt, and Midwestern states tend to carry lower average credit card debt. Salaries and cost of living could play a role in the amount of credit card debt in various regions across the United States.
Tactics for Paying Off Credit Card Debt
Those who carry the most credit card debt will have a harder time paying off credit card balances and will pay more interest in the process of doing so. Still, considering the potential for future rate increases based on the Federal funds or prime rates, paying off credit card debt sooner rather than later will be beneficial.
Use a Balance Transfer Card
Consolidating debt with a balance transfer credit card can make it easier to pay off high interest rate balances. The best balance transfer credit cards have long 0% interest promotional periods and even extend the promotional rate to new purchases.
During the promotional period, you won't have any finance charges added to your balance so your payments are more effective. The danger is in running up a large balance with the false feeling of "easy money" and then facing escalating interest payments. Also, this only works if you stop using the credit cards you paid off with the 0% offer.
Pay More Than the Minimum
Paying more toward balances each month is another strategy for paying off credit card debt faster because the amount of interest that compounds is lower.
Focus on One Card
Pay the most on the card that has the highest interest rate and only the minimum payment for the others until that one is paid off. Continue this process until all your card balances are paid off.
Cut Your Spending
Make a budget if you don't already have one and look at ways to cut each item so you could put the saved money toward repaying your debt even faster. If you try spending cuts, debt consolidation and other methods but still find yourself in debt, consider contacting a reputable debt relief company for help.
- Credit card debt has historically been on the rise in the United States.
- The economic crisis of 2020 temporarily changed this trend, resulting in lower balances year-on-year.
- Interest rates are pegged to the Federal funds and prime rates.
- The longer you take to pay off a card, the more additional interest you will accrue.