Americans Are Burning Through Their Savings And Using Credit Cards More And More

Americans’ savings may be non-existent soon as they are just churning through them and putting all their expenses on credit cards in order to maintain their spending habits.  Factor in looming concerns over inflation, rising interest rates, potential economic downturns plus the surge in consumer spending over the past year, fueled by rising wages and pandemic-induced savings, and you have a financial disaster on your hands. However, the consequence of this spending spree is evident in the mounting credit card debt and the dwindling savings accounts of many Americans.

What do the numbers say?

U.S. consumers’ credit card balances reached a new record high of $986 billion in the fourth quarter of 2022, reflecting a 7% increase. Additionally, Morgan Stanley estimates that consumers spent roughly 30% of the $2.7 trillion in excess savings accumulated during the pandemic, with lower-income consumers tapping into even more of their pandemic savings—closer to 50%. The rapid depletion of savings has experts worried that the trend is unsustainable and could lead to a slowdown in consumer spending or, worse yet, a recession.

The massive reliance on credit has helped household debt reach a record $16.9 trillion. These numbers get even worse considering that 46% of credit cardholders now carry credit card debt, compared to 39% a year ago.

Despite some positive economic indicators, such as a rebound in retail sales and job additions, there are signs that consumers’ ability to sustain elevated spending levels is faltering. High inflation continues to impact Americans across all income levels, with over 80% of middle-income households having to dip into their savings to make ends meet, according to a study by Primerica. Moreover, lower-income families have already exhausted their pandemic savings and are now tapping into their regular savings, as noted by Gregory Daco, chief economist at EY-Parthenon.

The increase in credit card debt, rising interest rates, and inflation are placing an increasing financial strain on households. Economists are concerned that this trend will continue and result in a considerable slowdown in consumer spending throughout 2023, which, given its massive contribution to the U.S. GDP (representing 70%), could have severe implications for economic growth.

What can we do about it?

If you’ve accumulated a lot of credit card debt over the past year, you’re likely spending a considerable amount on interest. If that’s the case, you can consolidate your credit card debt using a balance transfer credit card that will likely have a 0% introductory APR period, allowing you to pay down your debt without accruing interest. What happens to your old credit card after a balance transfer?

After a balance transfer, your old credit card account will undergo some changes depending on the specifics of the transfer and the policies of the credit card issuer. Here’s what typically happens:

• Transfer of Balance: The outstanding balance on your old credit card is transferred to the new credit card where you initiated the balance transfer. This is done to take advantage of a lower interest rate or promotional offer on the new card.
• Payment to Old Credit Card: Once the balance is transferred, the new credit card issuer will pay your old credit card company to settle the transferred balance. This effectively pays off the debt on your old card.
• Account Status: After the transfer, the old credit card account may have a zero balance or a remaining balance, if not all of the debt was transferred. The account will likely be updated to reflect the transfer and its new status.
• Account Closure: Depending on the terms and conditions of the old credit card, it may be closed by the issuer. Some issuers automatically close the account after a balance transfer to prevent customers from accumulating new debt on the card.
• Credit Limit Adjustment: With the transferred balance on the new credit card, your credit limit on the old card will be adjusted accordingly. It may be reduced or set to zero.
• Effect on Credit Score: A balance transfer can impact your credit score. Closing the old credit card may reduce your overall available credit, affecting your credit utilization ratio. Additionally, opening a new credit account may lead to a temporary dip in your credit score, though it can improve in the long run if you manage the new card responsibly.

Bottom line

The statistics indicate that Americans are rapidly spending their savings and increasingly relying on credit cards to sustain their current consumption levels. While some positive economic indicators may offer a glimmer of hope, the overall trend suggests that the recent spending spree is unsustainable and could soon lead to significant economic challenges. As the nation faces inflation, rising interest rates, and mounting credit card debt, it is crucial for individuals to exercise prudence in their financial decisions and consider the pros of credit card balance transfer or other responsible financial strategies to manage debt effectively.