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The country’s mounting card debt threatens to overwhelm your savings.
More than one-third of U. S. adults (36%) have more credit card debt than emergency savings, according to an annual survey conducted by Bankrate, the financial site. In more than a decade of polling, that figure is at an all-time high. .
This is one of many recent reports that seem to indicate that consumers are failing their credit cards.
About a portion of all credit card holders now carry monthly balances, Bankrate found in a survey, up from 39% in 2021.
The borrower has $6,360 in card debt, TransUnion reports, a record.
“It’s concerning because credit card rates are at record highs,” said Ted Rossman, senior industry analyst at Bankrate. “Unfortunately, we’re moving in that direction in a lot of areas. “
Card balances add up with interest rates — the higher the rate, the more you’ll have to pay to decrease the balance.
The average credit card now charges 21. 5% interest, according to an index from WalletHub. This is the rate ever recorded.
On top of that, Bankrate found that 43% of cardholders with debt don’t know how much interest they’re paying.
Credit card debt is surfacing at a time when America is struggling to save.
The nonpublic savings rate rose to 3. 8% in January, according to federal data, meaning consumers have set aside only a small portion of their income source for savings.
It’s not an all-time high, but it’s close. For most of the past decade, the savings rate has been above 5%.
In Bankrate’s annual Emergency Savings Report, released last month, more than two-fifths of adults said they don’t have the savings to cover an emergency expense of $1,000 or more. The report is based on several recent surveys.
In the long run, however, Americans are more successful at saving.
The average family had $8,000 in “transaction accounts” in 2022, up from about $5,000 in 2010, according to the Federal Consumer Finance Survey. Transaction accounts include savings and checking accounts.
But the federal investigation doesn’t fully explain the rise in credit card rates, which began in mid-2022.
The average interest rate applied to credit cards increased to 21. 5% in November 2023, up from 15. 1% in May 2022, for WalletHub.
Card rates have risen in tandem with interest rates across the board: Federal regulators introduced a historic crusade to raise rates to curb inflation, which peaked at more than 9% in 40 years in the summer of 2022.
Taken together, the knowledge suggests that many Americans face a dilemma: build their emergency savings or pay off their credit card debt?
Financial planners advise Americans to build up enough emergency savings to cover 3 to six months of expenses.
But less than a part of us does.
Bankrate found that 30% of adults had enough emergency savings to cover six months of expenses. About a portion had savings to cover three months of expenses. One-fifth of respondents reported having no emergency savings.
We asked the experts for one priority: saving on construction or paying off credit card debt.
Most gave an unequivocal answer: pay off card debt, even if you dip into your emergency savings.
For some advisors, the choice is based solely on interest rates.
“Not all debt is created equal,” Corey Carlisle, head of public policy at Varo Bank.
Even the most physically powerful high-yield savings accounts pay no more than 4% or 5% interest. These rates are nowhere near the interest rate of a typical credit card.
Bottom line: Card debt costs you more than what you earn from your savings.
If the credit card’s annual percentage rate is higher than the savings account’s rate, “it makes sense to prioritize paying off credit card debt,” said Niv Persaud, a qualified money planner in Atlanta.
“You want to use your savings to pay off your credit card debt,” echoed Randy Bruns, a qualified money planner in Naperville, Illinois.
Once you’ve paid off your card debt, Bruns said, create normal deposits in your savings to complete the balance.
Another way to jumpstart your savings: Make a generous contribution when you make a windfall, Carlisle said: a work bonus or a tax refund.
Catherine Valega, a qualified monetary planner in Boston, recommends finding a balance between debt reduction and construction savings.
“We split the payments, so some goes to emergency savings,” to cover new tires or home repairs, “and another part goes to pay off debts,” he said.
If you need emergency savings to pay off your credit card debt, “try to keep at least a month’s worth of must-have expenses in your emergency reserve,” Persaud said. “That way, you won’t have to rely on your credits. “card in case of emergency. “
If you’re determined to pay off your card balance, experts say, be competitive with your payments.
The minimum payment, calculated through the card company, covers interest owed and 1% of the balance, Rossman said.
Let’s say you have a balance of $6,360, at an interest rate of 22%. If you make the minimum payments, it will take you about 25 years to pay off the debt and pay $11,000 in interest on most of the principal, according to a bank rate calculator.
To make a real dent, experts say, avoid charging new fees on the card.
“Transfer your expenses to money and debit,” Rossman said.
Fee caps: The government sets limits on overdue credit card fees
Then, increase your payments. Consider a monthly sum equal to 5% of your gross income. You can also make double the minimum payment in the first month. Pay the same amount in the following months as the balance decreases.
If you have multiple cards, settle on one and seriously consider paying it off. Start with the card with the highest interest rate or the card with the lowest balance. Soon you will be able to dedicate yourself to saving.
“It’s hard to build wealth when you’re paying interest at 20 or 25 percent,” Rossman said.
Daniel de Visé covers finances for USA TODAY.
This article made the impression in USA TODAY: Credit Card Debt Is Overwhelming U. S. Consumers’ Savings