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U.S. Consumer Credit Increases Amid Rising Interest Rates

Consumer credit in the United States continued to increase, albeit at a slower pace, as of July 2023, according to the latest data from the Federal Reserve. Here are the key highlights:

Overall Consumer Credit Growth

  • Annual Rate: Consumer credit increased at an annual rate of 2.5% in July, reaching approximately $4.98 trillion. This growth reflects the combined total of revolving credit (such as credit cards) and nonrevolving credit (including personal loans).
  • Composition: Revolving credit, which includes credit card debt, increased at a more rapid annual rate of 9.2%. In contrast, nonrevolving credit, comprising personal loans and other fixed-term loans, saw a more modest annual growth rate of 0.2%.

Credit Card Interest Rates

  • Increasing Interest Rates: The average credit card interest rate as of the second quarter of 2023 stood at 20.68%, representing a significant increase from 15.13% in the second quarter of 2022. This surge in credit card interest rates has raised concerns among consumers and experts.

Borrowing Trends

  • Credit Card Reliance: High inflation and increased costs of living have prompted many Americans to rely on credit cards for their expenses. A survey revealed that two in five American credit card holders now depend more on their credit cards than ever before.
  • Difficulty in Paying Off Debt: Despite the increased use of credit cards, many consumers express concerns about their ability to pay off the additional debt. Over a third of Americans stated that they are likely to max out at least one credit card before the end of 2023.

Student Loan Debt

  • Student Loan Debt: Outstanding student loan debt increased to approximately $1.76 trillion in the second quarter of 2023, up from about $1.74 trillion in the previous year. Many borrowers will resume federal student loan payments in October 2023, potentially increasing their monthly financial obligations significantly.
  • Impact on Borrowers: The prospect of higher student loan payments is pushing some borrowers to consider using credit cards to cover these obligations, particularly for those facing substantial increases in their monthly debt payments.
  • Federal Initiatives: To assist borrowers with upcoming student loan payments, President Joe Biden has announced initiatives such as the Saving on A Valuable Education (SAVE) plan, an income-driven repayment (IDR) plan aimed at reducing monthly payments for eligible borrowers.

Managing Debt

  • Options for Managing Debt: There are several strategies consumers can consider to manage their debt effectively. These include using personal loans with lower interest rates, balance transfer cards to consolidate and pay off high-interest credit card debt, and student loan refinancing for those with private student loans.

As consumers navigate the evolving landscape of credit and rising interest rates, understanding their options for managing debt is crucial. Exploring alternatives such as personal loans, balance transfer cards, and student loan refinancing can help individuals make informed decisions to alleviate their financial burdens.

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