How to Manage Credit Card Debt During Inflation

It may be tempting to rely on credit cards during times of inflation, but you could end up digging yourself a hole that'll take months or even years to escape.

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Inflation has hit a 40-year high in 2022, jumping as high as 9.1% year over year in June, compared to the long-term average of about 3.2%. And according to data from credit reporting agency Equifax and the New York Federal Reserve Bank, it appears that some Americans are relying on credit card debt to keep up.

If you're concerned about how inflation may be impacting your budget and your relationship with credit cards, here's what to know about what's going on and how to handle your debt.

Many Americans Relying More and More on Credit Cards

In a report released by Equifax, the agency found that banks issued 18.6 million new credit cards in the first three months of the year, a 28.4% increase from the same period in 2021.

During the second quarter of 2022, the New York Fed found that credit card balances increased by $46 billion. That's a 13% increase from the same period the previous year, which is the largest such increase in more than two decades.

In total, Americans carry $890 billion in credit card debt, just shy of the all-time high of $930 billion in the fourth quarter of 2019.

These figures show that not only has spending increased since the height of the pandemic when credit card balances plummeted but may also hint that consumers are turning to credit cards to deal with the increasing prices for goods and services.

How Relying on Credit Cards Can Do More Harm Than Good

Credit cards can provide a lot of value to consumers through convenience, security, rewards and other features. And in times of financial stress, they can also help you continue to cover necessities until you're back on your feet.

But if you're not careful, use of credit cards can pose a threat to your financial well-being.

According to a report by the American Bankers Association, about 4 in 10 credit cards have a balance that carries over from month to month at least once per quarter. Credit card holders who carry a balance may face several pitfalls, including:

• Interest: The average interest rate for credit cards that assess interest is 16.65%, according to May 2022 data from the Federal Reserve.
• No grace period: If you don't pay your balance in full by your account's due date, each new purchase starts accruing interest immediately until you've paid your balance in full.
• Higher monthly payments: As your balance grows, the calculation for your minimum monthly payment will also increase, which can put further pressure on your budget.
• Increasing credit utilization ratio: Your credit utilization ratio is the percentage of your card's credit limit that you're using at a given time. Higher utilization ratios typically correlate with lower FICO® Scores.

How to Handle Credit Card Debt

If you've been using credit cards to deal with some of the effects of inflation on your budget, here are some steps you can take to reduce your spending and your credit card balances:

• Review your expenses over the last few months to understand where your money is going.
• Cut back on discretionary spending and reallocate that money toward paying down your credit cards.
• Reevaluate monthly subscriptions and get rid of ones you don't use regularly. You may also consider sharing certain subscriptions with loved ones.
• Limit your spending on credit cards to an amount you can afford to pay back every month. You may even consider switching to a debit card or cash until your debt is under control.
• Consider a balance transfer credit card or personal loan to consolidate a large credit card balance.
• Consult with a credit counselor, if necessary, to get help with your interest and monthly payments.

How to Avoid Relying Too Much on Credit Cards

Regardless of your financial situation, it's important to use credit cards responsibly to avoid getting into trouble with debt. Here are some tips that can help you avoid letting inflation result in overwhelming debt:

• Avoid opening multiple credit cards in a short period of time.
• Make it a priority to pay your balances on time and in full every month.
• Spend only what you can afford to pay back.
• Consider avoiding credit cards if you struggle with overspending.
• Make multiple payments throughout the month to keep your credit utilization ratio low.
• Avoid using your card when a merchant charges an extra fee for it.
• Avoid spending more than you normally would to earn a sign-up bonus or other rewards.
• Consider using cash-back rewards to help pay down your balance.

As you become more mindful of your relationship with credit cards and how they're impacting your financial well-being, consider these and other tips to help you avoid overutilizing your cards and take advantage of their benefits without the dangers of credit card debt.

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Ben Luthi

Ben Luthi has been writing about money and travel for seven years. He specializes in consumer credit and has written for several major publications and industry leaders, including U.S. News and World Report, Fox Business, Wirecutter, Experian, and Credit Karma.