Rising credit card debt can become a problem for a number of reasons, namely that it could destabilize the economy, indirectly affect interest rates, and drive more people into debt that’s difficult to pay off. While no individual can control the circumstances of the economy at large, everyone can empower themselves with the knowledge and strategies for how to pay off credit card debt. Part of that knowledge is understanding current trends and how they may affect consumers.
Debt goes up, savings go down
If consumers are spending more that means they are likely saving less. Indeed, the U.S. personal savings rate has fallen significantly in recent years from 33.8% in April 2020 down to 8.8% in June 2021. The more debt continues to rise and outpace savings, the more the danger of an economic depression grows. In an extreme scenario, if debt rises beyond the point where it can be paid off, the economy could collapse. Leading up to that extreme would be an increase in debt defaults, or situations where the debt cannot be paid off. Lenders may find ways to recoup their losses by scaling back how much they lend, and/or by raising interest rates.
The cost to cover debt might be passed on to the consume
We might see a spike in interest rates due to an increase in credit card delinquencies. A delinquency is a failure to meet the minimum payment requirement on a credit card bill. In order to recoup the losses from delinquencies, credit card companies may reduce the scope of their rewards programs and drive up interest rates.
It can create a debt trap
The more debt accumulates, the harder it is to pay off. Individuals can easily fall into debt traps if they borrow more than they can pay off, and steep interest rates only exacerbate the difficulty. If you find yourself in a financial hole, consider using a snowball debt calculator to help you plan your way out. You may also consider looking into ways to refinance your debt so that you can lower the interest rate(s) of your outstanding debt(s). Just because a growing number of people are going into debt doesn’t mean it’s financially healthy to do so.
Don’t make debt your problem
Rising credit card debt is not an issue to be taken lightly, as irresponsible lending and borrowing practices have led to severe economic crises throughout history. However, individuals can do their part by paying off debt as quickly as possible. It’s always best to pay off monthly balances in full and on time.