Consumers say this pitfall is ‘their biggest threat to building wealth’ — yet about half do it anyway

Consumer spending has remained remarkably resilient in the face of persistent inflation — but that has come at a cost.

To keep up with higher prices, Americans racked up more credit card debt than ever this year. Not only are balances higher, about half, or 47%, of cardholders are carrying debt from month to month, creating a cycle that’s particularly hard to break.

“Credit card debt is easy to get into but hard to get out of,” said Ted Rossman, senior industry analyst at Bankrate.

Now, 39% of adults said credit card debt is “their biggest threat to building wealth,” according to a new Edelman Financial Engines report. Even among wealthy respondents, or those between the ages of 45 and 70 with household assets of up to $3 million, 32% said the same.

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Unlike other types of debt, such as a mortgage or even student loans, “credit card debt is not secured by an asset that potentially gains value over time,” said Rod Griffin, senior director of consumer education and advocacy for Experian.

“For that reason, taking on too much credit card debt can chip away at a person’s financial health.”

Yet, a prolonged period of higher prices has caused consumers to spend down their savings and lean on credit anyway.

Collectively, Americans now owe a record-breaking $1.08 trillion on their credit cards, according to a November report from the Federal Reserve Bank of New York.

At the same time, credit card rates have spiked along with the Federal Reserve’s string of 11 rate hikes, including four in 2023. The average annual percentage rate rose from less than 15% as recently as last year to more than 20% today — also an all-time high.

Despite the steep cost, consumers often turn to credit cards, in part because they are more accessible than other types of loans, according to Matt Schulz, chief credit analyst at LendingTree.

But that spending comes at the expense of other long-term financial goals.

“If you are not grounded in long-term goals, short-term budgeting can get away from you,” said Kelly O’Donnell, chief client officer at Edelman Financial Engines. Instead, “set up long-term goals and work backwards.”

“However, when credit cards are used well, they can help achieve financial goals,” Experian’s Griffin said.

For example, consumers who pay their balances in full and on time every month and keep their utilization rate, or the ratio of debt to total credit, below 30% of their available credit, can benefit from credit card rewards and a higher credit score, which paves the way to lower-cost loans and better terms. That can be significant when it comes to major milestones, such as buying a house or qualifying for an apartment rental.

“In the end, it’s the decisions the consumer makes about how they use the credit card that determine whether it becomes a financial threat to building wealth or a tool in helping them achieve their financial goals and dreams,” Griffin said.

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