Christmas is over and now comes the financial hangover. In an episode from earlier this year, guest host Jonquilyn Hill looks into the root causes of America's record-high credit card debt. This episode was produced by Victoria Chamberlin, edited by Matt Collette, fact-checked by Laura Bullard and Amina Al-Sadi, engineered by Andrea Kristinsdottir and Patrick Boyd, and hosted by Jonquilyn Hill. Transcript at vox.com/today-explained-podcast Support Today, Explained by becoming a Vox Member today: http://www.vox.com/members Learn more about your ad choices. Visit podcastchoices.com/adchoices
Chapter 1: What caused the rise in credit card debt?
There was this brief moment a couple years ago when it looked like Americans just might finally get their credit card spending in check. We were spending less during COVID and those federal stimulus checks meant a lot of us were actually making more money.
But then when those ended and inflation reared its ugly head and came back around, it really caught people off guard and they're digging themselves deeper and deeper into debt in order to make ends meet.
Over the past year and a half, as Americans were putting more on their credit cards than ever before, interest rates rose on those cards by nearly a third.
I could put all of my entire paycheck towards paying it off for the entire year, and it would still take me about two years to pay it all off. Plus interest.
Coming up on Today Explained, we're revisiting an episode from earlier this year about how Americans racked up over a trillion dollars in credit card debt and what it'll take to get out of it.
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Chapter 2: How high are current credit card interest rates?
As you were doing that explanation, I couldn't help but hear the voice of my mom. Like I remember the first time my credit card limit got raised and I didn't add. They were just like, yeah, hey girl, you want some more thousands to spend? And my mom was like, no, that's what they want. Like, don't do it.
Someone I spoke to last year as well talked about it. His name is Josue Henriquez, lives in San Francisco. And he talked about how when he emigrated to the US, he wanted to build his credit to eventually buy a house one day. And so he took out a credit card when he was 18 and he got a $500 limit, which does not exist anymore.
But over time, as his limit increased, as he got more credit card offers, fast forward 10 years, He's $25,000 in debt. He has to work with a debt consolidation company to pay it all down. Completely wrecks his credit score because of what's needed in order to work with those creditors and things like that. And then during COVID, he lost his job.
And so even though he had paid it all down, you know, after... seven or eight months, he was back to $20,000 in credit card debt just to make ends meet. And I think that him sharing that story with me just felt like something that is a paradigm for what a lot of people are experiencing with credit cards. You know, they're just trying to make ends meet. They're just trying to survive.
They're slowly trying to pay it down and pay a little bit extra every month or every other month. But because people have so little in savings, you know, you're one car problem away from being knocked all the way back to the beginning, so to speak.
My name is Sam calling from Greenville, South Carolina. I had to use credit cards to get me through college because the federal government would not loan me enough money to make ends meet. I am now working almost 80 hours a week just to make the minimum payments on my credit card.
Hi, my name is Olena. I am from Atlanta, Georgia, and I am actually about to file for bankruptcy because of just the high cost of living. It has put me into really deep credit card debt. I can't even make the minimum payment anymore.
Hi, my name is Lillian. I'm 26 years old. I live in Nashville, Tennessee. I currently pay off my credit card every month at the end of the month. But it has been a major problem with me saving money. Just not being able to save those extra $2,000 a month because it's all going towards the credit card. So, yeah, just trying to keep more in touch with what I'm spending every month.
But it's hard to do when all of your spending, including your groceries, your gas, your day-to-day expenses, go on the credit card.
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Chapter 3: What happens when you only make minimum payments?
Is this credit card debt evenly distributed throughout demographics or are there subsets of people in the country who are feeling this a lot more?
One group that's having a hard time when it comes to credit card debt is Gen Z. A report from the Federal Reserve Bank of New York found that one in every seven Gen Z credit card borrowers are completely maxed out on their balances. One factor to this is that Gen Z credit card holders have much lower limits to begin with.
So the median credit limit for Gen Z was $4,500, whereas it's over $16,000 for all the other generations. But it illustrates how younger borrowers get trapped in this cycle right from the start, especially when they either aren't earning enough or they're using a card as their emergency fund since they don't have that safety net established yet.
There was also a recent study from TransUnion, which found that 84% of 22 to 24-year-olds had a credit card in 2023. When that same age bracket was measured with millennials back in 2013, only 61% of them had a credit card. So it's not really a kids being kids argument.
Whether they want to or they need to, Gen Z consumers are opening up and using their credit cards sooner than previous generations.
I want to talk about the almighty credit score, like which is part of the reason people even get credit cards in the first place. You know, you needed to get a car. You need to get a house like you need it for all these things. What is this doing to people's credit scores?
Utilization is a pretty chunky part of credit score. It accounts for 30% of the overall FICO score. So in the moment, as long as people are paying their credit cards and they're not maxing themselves out in terms of their balances, it won't necessarily impact their credit score. Delinquency does impact the credit score, right?
If you start missing payments, then you're going to get dinged for that. It's also a great point that credit score culture in general, it's kind of twisted. And for most people, when they're young, the easiest way to build up your credit history and to get a line of credit of some kind is the credit card. That's the fastest way to open up a line of credit in most cases.
And so we kind of have this culture that, I mean, not even just culture, it's just in terms of how people buy a house, how people buy a car, your credit score, it's very much your financial rating, you know, it's your track record. And so it's kind of difficult for us to divorce ourselves from credit card culture because of that.
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