Danielle Foskie, an American woman, is one of a growing group of Americans who are stuck in a credit card loop.
Foskie is a registered dental hygiene who lives just outside Cleveland, Ohio. She couldn't pay her bills after Covid-19 disrupted business at the office where she worked. She turned to credit cards to get by and eventually accrued $60,000 of credit card debt.
The stress was intense. Foskie said to CNN, 'I've never been in a similar situation.
She is not alone
According to a report by the Consumer Financial Protection Bureau, in 2022, one out of 10 (9.9%), general purpose credit cards in the United States will be in "persistent debt" -- a situation that is difficult to escape, where borrowers pay more in fees and interest than they do in principal.
The CFPB attributes this trend to shrinking paychecks (after adjusting for inflation), and rising borrowing costs.
People get themselves into a situation that they cannot get out of. CNN reported that 'the fees and interest are what keep people in this situation.
According to the CFPB’s biennial report on consumer credit cards, Americans paid $105 billion for credit card interest in just one year. This includes $30.5 billion for the fourth quarter -- the highest amount since at least 2015
According to the CFPB, roughly one third of cardholders who have the lowest credit scores - subprime or deep subprime - were in persistent debt in 2017. This is up from about 25% in 2021, and close to pre-Covid levels.
Officials at the CFPB expect that by 2023, there will be even more Americans trapped in this doomsday loop.
The industry rewards you to get in. The CFPB official stated that you may think that you will pay off everything every month but things can sometimes not go according to plan. If you carry a balance you will pay a heavy price.
Credit cards are one of the most expensive methods to borrow money, especially in these times.
Bankrate.com reports that the Federal Reserve's aggressive war against inflation, which includes interest rate increases, has pushed credit card rates up to new records.
The Americans continue to use credit cards despite the high cost of living. According to the New York Fed, US credit card balances exceeded $1 trillion for the first ever time during the second quarter this year.
According to the CFPB, interest rates have increased since mid-2021 due to Americans spending more on their credit cards and increasing borrowing costs.
The CFPB's report contains warning signs that consumers may be facing financial stress, even though unemployment is historically low.
According to the report, quarterly late fees for the first quarter of 2013 exceeded $4 billion.
The CFPB reported that annual late fees will increase by 28% to $14.5 billion in 2022, returning to pre Covid levels.
Late fees are the most damaging to Americans with lower credit scores.
The CFPB reported that even though subprime consumers held only 6% of credit card accounts last year, they generated 28 % of all late fees. By contrast, the highest-scoring consumers generated only 6% of all late fees.
Earlier this summer, the CFPB released a proposal that would cap late fees on credit cards at $8. This is a dramatic drop from the average fee of $32 in 2022.
Many Americans only pay the minimum amount on their credit cards, which can increase the cost of borrowing as well as the time it takes to repay the debt.
According to a CFPB report, in 2022 only 13% of all credit cards and 17% private label cards paid the minimum amount due every month.
Nearly one third (31%) subprime private-label accounts only make the minimum payment. This is the first year that the CFPB has tracked this metric.
Renee Barrett (48), a mother of twins living in the Bronx decided to change careers during the pandemic and found that she was only able to pay the minimum amount.
Barrett stated that he had no savings when he resigned from his job.
Barrett eventually accumulated a $10,000 credit card debt, on top of the $40,000 in student debt.
Barrett warned others not to use credit cards unless they are 'absolutely certain' that the debt can be paid back.
Despite signs of consumer anxiety, the credit card sector continues to do well financially.
The CFPB reported that credit card issuers' profitability dropped in 2020 due to Covid, but recovered sharply in 2021. Last year it remained at 2019 levels or higher. The report warned about an 'apparent absence of competition' in credit card rates.
Rohit Chopra, Director of the CFPB, told CNN that 'Credit is still widely available and card companies are making a lot of money'. It's important that we increase competition in the market to allow Americans to switch their credit card balances at lower rates.