Credit card misuse can create difficult financial challenges for many Americans, but when handled responsibly there are several rational justifications for their use.
Convenience and safety are two of the main incentives for consumers to pay with credit cards. They allow people the ability to avoid carrying cash and they are safer than debit cards.
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And building a good credit score is important for a number of reasons, including big purchases such as homes and cars.
Rewards programs for perks such as cash back and travel can also incentivize many people to use credit cards.
Many credit cards also offer spending tracking features for budgeting and financial planning.
Some credit card holders are able to pay off their full balances each month. Others pay the minimum due or some other amount, which carries over debt and can add to it over long periods of time.
And a look at income differences between households with credit card debt and those without it reveals a pattern.
Credit card debt and its relationship to household income
Households with credit card debt turn out to be concentrated in the middle of their income distribution.
The Federal Reserve Bank of St. Louis published some data explaining the specifics. It calculated the share of households with credit card debt by income decile, with the lowest income group being the first decile and the highest income group being the tenth decile.
“Households in the upper-middle of the income distribution — those in the fifth, sixth and seventh deciles — were the most likely to hold credit card debt,” the bank wrote in its On The Economy blog. “In fact, 60% of households in the seventh decile had credit card debt, compared with only 25% and 28% in the 10th and first deciles, respectively.”
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The bank suggests that one explanation for this could be that lowest decile households might not have the well-established credit to qualify for credit cards and also may not have access to banking services.
Households in the higher income deciles likely tend to have the money and savings to pay off their credit card debts more quickly.
A pile of credit cards is pictured. Households across varying income levels are seen to experience different likelihoods of having credit card debt.
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The average balance for households with credit card debt
For a large number of people, payments on these balances are a significant financial burden each month.
The households with credit card balances were paying, on average, $180 per month on their credit card debt.
“The relatively high interest rate on this debt makes it an expensive form of borrowing,” the reserve bank wrote. “And if credit card interest rates continue to rise, this debt burden may become even larger.”
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The average total balance of a U.S. household is about $7,226. A look at rising interest rates explains how this can become a problem.
In November 2021, the interest rate on that credit card debt was 15%. That worked out to $90 per month in interest.
In November 2023, the interest rate had grown to about 21%. So the household was now paying $126 per month in interest, and that doesn’t count paying off any of the principal.
“By way of comparison, interest rates on personal loans over this same period only increased from around 9% to 12%,” the bank wrote. “Households forced to take on even more credit card debt to cover emergency expenses would see their payments grow further still.”
“Households in the lowest decile of the income distribution have the most credit card debt relative to their incomes, making them the least equipped to see their payments go up significantly.”
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