The number of Americans carrying a credit card balance is climbing, with many using their credit to cover unexpected or emergency expenses, a new Bankrate report reveals.
The share of credit card holders that carry a balance has increased to 49% — up from 39% in 2021, according to Bankrate's survey of 2,350 U.S. adults conducted in late November.
This is likely due to the increased cost of credit card debt over the past two years. The average interest rate has climbed from an average of 16.45% in 2021 to 22.77% in October 2023, according to the Federal Reserve.
Of those with credit card debt, 43% say they carry a balance because of an unexpected or emergency expense, most commonly medical bills or car and home repairs. However, financial experts don't recommend financing these costs with your credit card, if you can help it.
Why credit cards shouldn't be used for emergency expenses
Credit cards tend to have high interest rates compared with other types of loans, which makes them a terrible option for debt financing. This is why experts recommend keeping your outstanding balance at $0 each month, if possible.
Paying only the monthly minimum payment is better than nothing. However, those payments only cover a fraction of the balance owed. The longer you take to pay the balance, the more interest you'll be charged, since it accrues daily.
Here's an example of how interest can cost you, even if you cover more than the minimum payment. Say you want to pay off an outstanding balance worth $5,000 within a year for a credit card with a 22.7% interest rate, the current average. You'd have to make monthly payments of $469, which would include $636 in interest charges for the year, per Bankrate.
However, if you took 24 months to pay off the same balance, you'd be making a monthly payment of $261. In that scenario, your total interest costs would double to $1,267 — more than a fifth of the original balance.
"I tell clients all the time that a credit card is not an emergency fund and it's not a way to spend more than you earn," says David Haas, a certified financial planner in Franklin Lakes, New Jersey. "You should always plan on paying your credit card bill in full every month."
Use an emergency fund to cover unexpected expenses instead
Instead of relying on credit cards for expenses you can't quickly pay off, it's ideal for cardholders to dip into an emergency fund, says Haas. An emergency fund is a cash reserve with enough to cover three to six months worth of your expenses, as commonly recommended by financial planners.
Of course, if you don't already have an emergency fund, it may be difficult to start building one while also paying off high-interest credit card debt.
To help lessen your debt burden, consider contacting your credit card company and requesting a lower interest rate, says John Cooper, a CFP in Hodges, South Carolina. You can also ask for a pause in payments or to have late fees waived.
You can also shop around for balance transfer credit cards, which allow borrowers to transfer existing credit card balances from one or multiple cards to a new card that offers a promotional interest rate of 0% for a set amount of time, sometimes as long as 21 months. This would buy you more time to pay down your debt.
Another option is consolidating your debts into a personal loan, which tends to come with lower interest rates than credit cards. Debt consolidation may also make your debt more manageable to repay, especially if you have many credit cards with outstanding balances.
The downside to personal loans is that you need a good credit score to qualify for good rates. Plus, some loans are "secured," which means they're backed by collateral like a home or car, which you could lose if you fail to make payments on time.
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