Consumers are opening new credit card accounts at a record pace in 2022, with already more than 12 million new credit cards being opened and a record $55 billion in new debt limits, a 60% increase from 2021. The average consumer pays around 16.75% in interest on their credit card right now and with interest rates rising to fight inflation it looks like the average interest rate on a credit card may go over 19% by the end of the year. To make matters worse, consumers are spending more money than ever through the first 4 months of 2022. Analysts believe that spending will continue to increase before hitting a wall. Some of the increased spending is due to corporate price gouging and some due to consumers just spending more on non-essential items.
It is unclear what is driving the demand for more credit cards. Whether consumers are borrowing more or borrowing because they can't pay back existing debt without the money is still unclear. What is clear is that rising interest rates means that paying back credit card debt is going to become near impossible for a significant number of families.
The average consumer carries around $5,000 in credit card debt at any given time. Paying the minimum payment every month at the average interest rate of 16.75% means that the average consumer needs 195 months to pay off that $5,000 debt while paying over $6,000 I interest alone during that time. To be clear, 195 months is more than 16 years. For some perspective, if you worked from the age of 20-65 years old it would take you more than a third of that time to pay off a mere $5,000 in credit card debt. That is absurd. When average credit card interest rates push up to 19% it will take more than 200 months to payoff.
To make matters worse, the rise in credit card debt accounts comes on the heels of a report that already showed that consumers have added record amounts of debt in the first quarter of 2022. It is also clear that old models relied on by experts to predict economic conditions and consumer confidence are no longer valid. We know that surveys show that most consumers do not feel good about current economic conditions, but those same surveys also show that consumers are taking on more debt and spending more and more money on nonessential items than ever before.
At some point this will lead to a flood of bankruptcies. It should lead to a flood of chapter 7 bankruptcies because there is no reason for any family living at or below the median family income level to struggle with paying off credit card debt. These families should strongly consider filing a chapter 7 bankruptcy to rid themse3lves of their debt once the burden is too big to carry month to month. That is how the system was designed to work and the smart consumer will consider a chapter 7 bankruptcy exit from debt the smart play.