Maxed Out: Inside America’s Credit Card Debt Crisis — and Where We Go From Here – CNET

As soon as Josué Henriquez turned 18, he applied for a credit card. He wanted to start building his credit so he could one day finance the purchase of a car or home.

“I was told it was the only way I could start my credit in this country,” he says, having relocated to the US from El Salvador as a child.

His credit card limit was low at just $500, with a requirement to keep $250 in a savings account to use it. But over the next decade, as more offers rolled in, both his credit limits and balances ratcheted up. Henriquez’s credit card debt ballooned to over $25,000, and he eventually sought out a debt relief company for help.

“I had five credit cards at the time. Now I only have two,” he tells me. The rest were shut down in the relief process. Now 33, the San Francisco resident needed nearly four years to get his credit card debt down to zero.

Many of us are headed in the opposite direction.

In August, the Federal Reserve Bank of New York released its Household Debt and Credit Report for the second quarter of 2023 with one particularly eye-popping statistic: Americans had surpassed a combined total of over $1 trillion in credit card debt. Three months later, the balance had already gone up an additional $48 billion.

What’s more alarming is that the cost of carrying this debt has also increased. Credit card APRs have gone up 30% in the last year and a half, eating away at consumers’ budgets more than ever before.

At the start of 2023, Cusido took out a $13,000 debt consolidation loan to regain control over her credit card balances. But instead of her total debt burden going down, it’s gone up.

“I’ve had a lot of heartbreak,” she says. She broke off an engagement in the spring and booked a trip to Greece to get away from it all, blowing the budget. Upon reflection, Cusido noted how previous experiences had shaped some of her money behaviors. 

“I’ve had unhealthy relationships in the past. One boyfriend I had early on in life told me my teeth are crooked, so I got braces again. Then a different boyfriend told me my clothes were drab. Now I have two and a half closets’ worth of clothes.” Her current goal is to have half her loan debt paid down over the next six months.

People you care about leave lasting impressions on you, for better or worse, and how you spend money may be directly tied to the experiences you’ve had in your relationships, says Traci Williams, a board-certified psychologist and certified financial therapist. “The pain of your experience lingers if it isn’t addressed, and spending money is one way you might try to soothe that pain,” she tells me.

When we’re stressed or sad, we want something that will make us feel better. We’ve come up with a pet name for this fix: retail therapy. There are two psychological feedback loops at work in retail therapy, and both of them are easy to reinforce.

The first is that the mere anticipation of using a credit card for a purchase activates the reward network in our brain, according to a 2021 study published in Scientific Reports. Researchers did brain scans of subjects as they considered buying Xbox controllers. What they found was a strong “step on the gas” correlation; the opportunity to pay with a credit card was exciting and anticipatory for the brain, releasing dopamine.

“Overspending can serve as a coping skill. It’s an unhealthy coping skill with potentially long-lasting negative consequences, but a way to cope nonetheless,” Williams says. A credit card works like an amphetamine, and many Americans are hooked.

A second feedback loop in retail therapy is reinforced by the omnipresence of targeted advertising. We buy what we are told will make us happy, healthy, thin and rich. This was not always the case.

By the early 20th century, consumerism was helping to prop up capitalism and supply chains. Corporations became more intentional about the long game of shaping the thoughts of the American consumer through advertising. They swirled together product features with desire, like when cigarettes were marketed to women as a way to remain thin. Today’s car commercials are prime examples of refined marketing techniques. People became interested in buying things not only for utility, but also to align with a status or image that was reinforced to them by retailers aiming to make a profit.

One way this targeted advertising shapes our perception is through sheer repetition. Those damn display ads follow you around for a reason: The more we see something, the more familiar it feels, and humans are drawn to familiarity. This is known as the mere-exposure effect. “It can be helpful to remind yourself that a company’s goal is to get you to spend,” Williams says.

When you need money for an emergency and don’t have it, a credit card is the fastest way to cover unexpected costs. Ian Group, a Florida-based lawyer who pivoted into personal finance content creatorship after grappling with a debt mountain of his own, found this out the hard way. 

“I figured I would come out of law school, make a lot of money and the loans wouldn’t be a big deal,” he tells me. Although he graduated at the top of his class, he also had $190,000 in student loans, and could only land a clerkship with a $50,000 salary. This left little wiggle room for emergencies, let alone making full loan payments.

“Things just came up, which I think resonates with a lot of people who are in credit card debt,” he says. With no money in savings, setbacks like car troubles would go onto the credit card, and Group soon racked up $20,000 in credit card debt. He also took a forbearance on his student loans during his clerkship, which paused his payments, but interest kept accruing. At its peak, his student loan balance hit $210,000.

“I felt really sick when I saw that,” he says. “I should have paid more attention, because those decisions had a big ripple effect on my future.”

Emergency funds are a challenge for millions because income has stagnated in comparison to both rising worker productivity and the rising cost of goods. From 1979 to 2013, hourly pay for middle-wage workers increased 6% and pay for low-wage workers decreased 5%, whereas pay for very high-wage workers increased 41%, according to the Economic Policy Institute, a nonprofit think tank.

If we don’t have much in savings, we’re more likely to lean into credit cards when budgets are strained or emergencies arise. Current credit card APRs make this strategy more treacherous. 

When inflation hit a 40-year high in 2022, the Federal Reserve stepped in to try to slow down the economy. The central bank has since raised rates 11 times, driving up the cost of borrowing. As the Fed raises rates, lenders typically raise interest rates on debt products like credit cards too. Average APRs have spiked to over 20%, a 30% increase over the last year and a half, with retail card APRs at nearly 29%.

For those who choose higher education, an additional financial hurdle looms. From 2000 to 2020, average post-secondary tuition costs outpaced wage growth by 111.4%, according to the Education Data Initiative, and students now borrow an average of $30,000 for a bachelor’s degree. Average student loan debt has tripled since 2007.

At current credit card APRs, paying only the minimum means you’ll pay considerably more than the original balance by the time you’re done. The Credit CARD Act of 2009 requires lenders to issue minimum payment warnings in their correspondence, but a financial literacy gap remains.

“I think there’s confusion around what a minimum payment does,” Macdonald says. “People are like, ‘Oh, I always pay my minimums,’ as if they’re telling me ‘No, I’m good.’ I’ll show you the calculation of how long it’s going to take to pay that off — it’s not good.”

Stacey Black, lead financial educator at not-for-profit credit union BECU, agrees. “This happens to a lot of people,” she tells me. Black says it starts with education; she teaches financial literacy classes to high school and college students, and sees firsthand how young people are often tasked with making important money decisions without understanding the fundamentals.

“When I was 18, I had no clue. I went to the mall and got a credit card, used it, charged it to the limit, then got another one,” Black says. “I did not understand the impact that would have on my financial future.” She says that by being open and honest in class about the mistakes she’s made, she gets a lot of people to also share their individual stories, although “they’ll wait until after class, and then come up to me and say ‘this is my situation.'”

Black says that when she asks students who already have a credit card how they got it, they say their parents gave it to them, and that “they have no clue” how to manage it.

Credit cards are really profitable

Credit cards are highly profitable for lenders because APRs and interest rates are hard for us to wrap our heads around. “Most financial costs don’t have visible price tags,” Morgan Housel writes in his 2020 bestseller The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness.

Banks figured this out in the 1980s. They realized that, to make someone use their credit card more, you simply need to make them feel like they’re spending less. Banks lowered the minimum monthly payment on credit cards from 5% to 2% of a borrower’s balance. They also increased consumers’ overall credit limits, particularly for big spenders.

For borrowers like Josué Henriquez, these increases create temptation. “Because I do payments that are like $2,000 or $3,000 at a time, my credit card companies will increase my credit line, which is not helpful because then I spend more,” he tells me. “Between my two credit cards, I have a $50,000 credit line, which is a lot of money.” 

A 2022 analysis from the Federal Reserve found that interest accounted for 80% of total credit card profitability, and credit card borrowers were charged $105 billion in interest last year.