America’s credit card debt crisis driven by inflation could lead to a vicious debt spiral


Rising prices have led the Fed to make a slew of interest rate increases over the past year in an effort to tame the red hot inflation rate—which currently stands over 7%, a far cry from the target 2% rate. 

While some progress has been made and November marked the lowest year-over-year rate increase since December 2021 (coming in at 7.1% compared to the 7.3% analysts had predicted), consumers have had to make changes to their spending habits to cover their basic costs. 

Many of them are opting for plastic.  

Americans are leaning on credit cards to make ends meet  

A new report by Bankrate found that 35% of U.S. adults carry credit card debt from month to month, up from 29% last year and 46% of credit cardholders carry debt from month to month on at least one card, up from 39% last year. 

What’s more, apart from higher debt balances, 43% of U.S. adults that carry balances don’t know all of their interest rates which could lead to a vicious debt spiral if not managed carefully. 

Currently, the average credit card interest rate is 20.04%, according to 

“Most people get into credit card debt either because of an emergency expense — something with their health, their home or their car–or simply because day-to-day expenses cost more than they’re bringing in,” says Senior Industry Analyst Ted Rossman. “These challenges have become especially significant due to high inflation and higher interest rates.”

Why consumers should be selective about their credit card use 

Sometimes, there’s no option but to lean on a credit card to cover your expenses in a pinch. But overusing this payment method can pose its own set of risks. 

“No one really chooses to be in credit card debt, however. If you don’t have the money and you need groceries or gas, those expenses could land on a credit card,” says Rossman. “That’s a debt cycle that’s easy to get into and hard to get out of.”

Overusing your credit cards can lead to…

  • Steep interest charges: With credit card interest rates hitting record levels, carrying a balance on your credit card could lead to high interest charges which can make it difficult to eliminate your debt balance. 
  • A lower your credit score: Your credit score is calculated by weighing a few different factors. This includes your payment history and balances. Missing a payment because your balance has become unmanageable or spending more than 30% of your credit limit could negatively impact your credit score

Alternatives to high-interest credit cards  

If you’re struggling to cover your daily expenses, a credit card can offer a quick solution. But if you hope to avoid a debt spiral, you may want to consider more long-term solutions. Some alternatives to relying on credit cards may include: 

  1. Boosting your emergency fund: Without an emergency fund, the smallest unforeseen expenses (or an increase in your regular expenses) can throw your finances off track. Aim to save a little each month in an emergency fund. Once it’s all said and done, experts say your emergency fund should be enough to cover three to six months worth of your regular expenses. During times of high inflation, you may want to revisit this amount to determine if you should put extra money aside to account for higher costs. 
  2. Looking for ways to increase your income: Taking on a side hustle or asking for a raise at work can help offset the burden of higher prices. Increasing your income may be as simple as asking your employer to reevaluate your compensation and adjust for added responsibilities or positive performance. If the answer is “not right now,” consider how you might use your free time and skillset to start a lucrative side business. 
  3. Looking for ways to trim your expenses: If you’re spending more on groceries, household expenses, or gas, you might want to examine your budget and look for other areas where you have the wiggle room to cut down on your spending. Maybe that’s spending less on dining out to account for higher gas prices or cutting out one of your streaming subscriptions. Small changes to your spending can add up to a lot over time. 

“It’s easier to get out of credit card debt if it was due to a one-time shock, because then you can address that with a 0% balance transfer card or a personal loan or a debt management plan offered by a reputable nonprofit credit counseling agency,” says Rossman. “If your finances are upside-down every month, that requires a more systemic solution.”

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