It’s no surprise that credit card balances are on the rise: according to the Federal Reserve’s latest G.19 consumer credit report, the total amount of revolving credit outstanding spiked by $13 billion in the third quarter of 2020 to $1.08 trillion — a record high.
The sharp increase in credit card debt stands in stark contrast to the year prior, when consumer credit card debt was decreasing as consumers began to focus on paying off debt and repairing their finances. But as the pandemic took hold and financial hardship and job losses began to mount, many consumers turned to their credit cards as sources of a short-term financial bridge.
The spike in credit card debt is particularly concerning given that after three and a half months of consecutive decreases, outstanding credit card debt had only returned to its 2019 levels in March of this year. In the months since, credit card debt has continued to skyrocket, caused by the increasing economic pressures of the pandemic on individuals.
One of the driving forces behind the record high in credit card debt is the increased reliance on payment deferral plans from credit card companies. With millions of Americans facing layoffs or reduced hours due to the pandemic, credit card companies offered consumers temporary payment deferral plans to provide some financial relief.
These payment deferral plans have allowed consumers to put their payments on hold without facing late penalties or interest charges, giving them time to get back on their feet. Unfortunately, these payment deferral plans may be doing more harm than good – as soon as consumers’ deferment periods end, they must begin paying the debt down in full, in addition to the interest that was still accruing during the deferment period.
This could lead to even higher levels of credit card debt in the fourth quarter of 2020 as consumers grapple with the massive accumulated debt they have racked up during their deferment periods.
To make matters worse, despite the current economic crisis, credit card companies are still inkling rates for some deposits and raising fees to boost their own profits. And there are still more consumers not using the payment deferral plans than those who are, meaning nearly half of all credit card debt is still accumulating interest charges.
The record-high levels of credit card debt pose a great risk to the financial stability of consumers and the economy as a whole. To avoid becoming a statistic that contributes to the record-high total debt, it is important to have an honest conversation with yourself and your financial advisor about your own debt levels and how to create a plan to pay off your debt. The sooner you make a plan to tackle your debt, the better it will be for your financial future.