Credit card debt climbs as consumers rely more on credit amid inflation

Yahoo Finance contributor Vera Gibbons explains why credit card debt is on the rise and offers tips on how to pay down the debt.

Video Transcript

DAVE BRIGGS: All right, inflation hovering near a 40-year high. And many people rely more and more and more on their credit cards. Recent data shows credit balances jumping by 13% in the second quarter from a year ago, the biggest gain in more than 20 years. It's not all bad news, according to our next guest joining us now, Yahoo Finance contributor Vera Gibbons. Very nice to see you. So it's not all bad news? Tell me more.

VERA GIBBONS: It shows that consumers are confident, so we're feeling pretty good about things. We're spending. But in large part, we are spending more-- putting more on our credit cards just because, as you point out, everything is costing more. The latest inflation data does show that things are, quote unquote, cooling off of it. But things are still historically high on everything from gas to groceries to rent.

So we are putting more on our credit cards in large part because we are forced to. But we're also spending more on experiences and travel. There is that big pent-up demand. And also, we're putting more on our credit cards against a backdrop of a decline in cash usage. So there's a number of reasons why we're putting more on the credit cards, but in large part, it is because everyday expenses are costing more. And what are we supposed to do? So.

DAVE BRIGGS: Very true. Are we seeing delinquency rates on the rise?

VERA GIBBONS: You know, you would think that delinquency rates would be on the rise, given the fact that we are spending more on our credit cards. But they're still at pre-pandemic levels. I mean, there is one slight worrisome group, and that's the subprime borrowers because we are seeing delinquency rates rise a little bit amongst that group.

But I think overall, lenders are feeling pretty confident because they look at the job market, the job situation. And if you look at that, it's one of the strongest job markets we've seen in decades. Unemployment's at a nice low. That's really the biggest indicator as to whether or not someone's actually going to pay their bills and pay their bills on time.

And interestingly enough, we are paying-- a lot of us are paying our bills on time. And more Americans, a near record number of Americans are actually paying their debts in full. Part of it has to do with the fact that over the past couple of years, we've had some cash in our pockets, prompted by government stimulus. So there's been some liquidity. And we've used some of that cash to actually pay down our credit card debt.

I think consumers have actually learned that this is expensive debt. And given the fact that the Fed is on this interest rate hiking campaign-- we've already had several interest rate hikes. They're expecting more. People are paying more attention to what's actually going on in the economy. And they want to actually pay this down. I mean, if you consider that before the Fed started raising rates, the rate was about 16%. And now it's hovering around 18% on the national average. I think more people are going to be paying more attention to paying down their debts.

DAVE BRIGGS: [INAUDIBLE] as the Fed continues to raise rates. No doubt a huge impact here. How about some tips, best ways to pay down your debt?

VERA GIBBONS: You know, it's interesting because I talked to a couple of people. They said they just sold a bunch of stuff on Facebook Marketplace to pay down their debts. Other people have had that cash, as I mentioned. They've had to liquidate. They've used that to pay down their debt. Some people have taken on part-time jobs to pay down their debts. But I think the two more common ways are the snowball method or the avalanche method.

The snowball is when you just chip away at the smallest balances first. You feel a sense of victory so you move on to the next credit card. Avalanche is when you attack the card with the highest interest rate first, and then work your way that way. But there's really no "one size fits" all strategy. But the main thing to know is that this is, in fact, bad debt. And this bad debt is getting more expensive. The average household has maybe $5,000 in credit card debt.

But people I know and you may know as well sometimes carry much higher balances. And if you run the numbers using an online calculator on, for example, you'll see that carrying this debt becomes really, really expensive. And the amount of interest you're going to be paying over a certain time period doesn't look-- that should actually entice you to pay more attention probably.

DAVE BRIGGS: All right, great stuff there. Vera Gibbons, appreciate you coming out with those tips. Good stuff.