Credit card debt adds up to $1.2 trillion in the United States, with $116 billion incurred in 2022. With most Americans citing finances as a significant source of stress, it’s clear that most adults don't know how to get out of debt or at least have practical resources and tools to help them.
Credit card debt is rampant in the United States. A recent analysis by WalletHub compared all 50 states using the most current consumer-finance date that the Federal Reserve and TransUnion have available. After an adjustment for inflation, the report ranked the states according to their credit card debt, both overall and the average in individual households.
The eye-opening results provide a bigger picture of American debt. The U.S. is struggling financially.
Hawaii and California Carry the Most Debt
The analysis examined household credit card debt, the increase in household credit card debt, total credit card debt, and the growth of total credit card debt. It then ranked each state according to its overall score.
Hawaii ranks first with the most household credit card debt, with $10,637 in debt. Alaska, California, New Jersey, and Maryland round out the top five. These states tend to have a higher cost of living than many other states, which explains why residents here have high credit card balances.
Kentucky, Nebraska, Indiana, Iowa, and Wisconsin are the five states that have the lowest household debt.
California leads the way with total credit card debt, with $152.7 billion, followed by Texas, Florida, New York, and Illinois. The total credit card debt figure can be misleading since the numbers are not adjusted for population, meaning the most populous states will tend to rank highest.
As a result, Alaska, South Dakota, North Dakota, Vermont, and Wyoming rank lowest in total credit card debt, all of which tend to be the least populated states. It is important to note this does not negate the indebtedness or the individual's need to supplement their income with a credit card.
Why is Credit Card Debt on the Rise?
The issue with rising credit card debt nationwide is primarily due to inflation. In the U.S., inflation peaked at 9.1% in June 2022. It has dropped since, but has yet to hit the Federal Reserve's target of 2%.
Steadily increasing interest rates are also responsible. Until March 2022, interest rates in the U.S. were just above zero percent. After March 2022, the Federal Reserve started increasing the interest rate at a steady pace. By July 2023, interest rates ranged from 5.25% to 5.50%, the highest in at least two decades.
With higher interest rates, credit card companies increase the rate for borrowers, making debt more expensive and, ultimately, more challenging to pay off. Before the Federal Reserve began to raise rates, the average interest rate on a credit card was 15%. Today, it stands at over 21%.
Using the household debt of the average Hawaiian as a guide, in 2020, with interest rates of 15%, the monthly interest charge on the $10,637 balance stood at $132. Today, this number is $185.
As balances increase, it doesn't take much for credit card debt to get away from a person and harm their lives. If they can manage it and pay off their debt immediately, the interest rates don't have that much of an impact, if any. That requires a great deal of organization and discipline, though. It means using a budget template that ensures the household is not overspending each month.
What do the Numbers Mean?
The data used in the analysis point to several critical areas of research. First, they look at each state's overall score based on the increase in total credit card debt, showing how the debt has grown on a macro level.
In the home, individual families are creating snowballing credit card debt. All states show alarming increases in household and total credit card debt.
It is important to note that the analysis measured the credit card debt increases by comparing the first quarter of 2023 to the second quarter of 2023. Credit card debt for households and the entire state has significantly increased in this short time.
In some cases, this indicates that some people are not living within their means and using their credit cards to supplement their paychecks. However, it is more likely that while individuals are indeed supplementing their salaries with their credit cards, they are doing so because they have no other choice. As inflation increases the prices of everyday goods, incomes do not stretch as far, resulting in the need to put these expenses on a credit card.
Methods for Minimizing Debt
While it may not have taken long for credit card debt to get out of control in many households, there are steps an individual can take to break free. First, households must understand that getting out of debt requires time and patience.
Many tout the effectiveness of Dave Ramsey's baby steps. These steps offer a framework for building a solid financial foundation and then attacking debt vigorously. While that may work for some people, it doesn't necessarily work for everyone.
One classic strategy for paying off credit cards is to start paying off the card with the highest interest rate and largest monthly payment. When you have paid off that card, repeat the process on the card with the next highest interest rate until you've paid off all your debt.
Jon is the founder of MoneySmartGuides, which helps people dig out of debt and start building wealth so they can achieve their dreams. He has over 15 years of experience in the financial services industry and 20 years of investing in the stock market. He has both his undergraduate and graduate degrees in Finance and is FINRA Series 65 licensed, and has a Certificate in Financial Planning.