More borrowers are getting trapped in a credit card doom loop

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CNN got a first look at a new report that sounds the alarm about the growing number of Americans whose finances are being throttled by credit card debt. It's worse than just paying the astronomical interest rates you get when you don't pay off a credit card every month – the report details how high rates and penalties can close in on borrowers in a way they can't break out of. Even if your credit card debt is manageable or nonexistent, this story serves as a cautionary tale on what CNN Business' Matt Egan calls a "credit card doom loop."

THE DOOM LOOP

• Last year, 1 in 10 credit card accounts were in “persistent debt,” a difficult-to-escape situation where borrowers are charged more in interest and fees than they pay down in principal, according to a new Consumer Financial Protection Bureau (CFPB) report shared first with CNN. “People get into this situation they can’t get out of. The fees and interest keep people trapped there,” a CFPB official tells CNN.
• And more are getting sucked in to the loop: The 9.9% of accounts in this debt spiral is up from 8.4% the year before.
• The CFPB blames it on rising borrowing costs and paychecks that have effectively shrunk because of inflation. Inflation is better but still outpacing many households’ wages, and the Federal Reserve’s interest rate hikes have made the already crazy rate you pay on credit card debt even crazier. (The average credit card interest rate has marched steadily up for months and is currently 20.72%, according to Bankrate.)
• All told, American credit card holders paid $105 billion in interest last year, and $25 billion in fees. The CFPB says that's a new record.

THE HARDEST HIT

• About 1 in 3 cardholders with the lowest credit scores — those classified as subprime and deep subprime — were in the doom loop last year, according to the CFPB. It was only about 1 in 4 the year before and is now approaching pre-Covid levels.
• Doing the minimum: A lot of Americans are only making the minimum payment on their credit card debt. That can drastically increase the overall cost of borrowing and how long it takes to pay it all back.
• About 13% of general credit card accounts and 17% of store-branded credit card accounts (think Target’s RedCard) made only the minimum payment due each month in 2022, according to the CFPB report.

THROWN FOR A LOOP

• Danielle Foskie, a dental hygienist who lives outside Cleveland, couldn’t pay the bills when Covid interrupted business at the dentist office. She turned to credit cards to get by, eventually racking up $60,000 in credit card debt. “The stress was very intense. I’ve never found myself in such a situation,” Foskie tells CNN.
• Renee Barrett, a 48-year-old mother of twins from the Bronx, found herself making just the minimum payments when she decided to make a career change during the pandemic. “When I got fed up with the work I was doing and resigned, I had no savings to fall back on,” Barrett says. Eventually, Barrett accumulated $10,000 in credit card debt on top of $40,000 of student debt.
• Barrett urges others to “never, ever” turn to credit cards to get by unless they know with “absolute certainty” it can be repaid.

“PROFITING HANDSOMELY”

• The credit card industry is doing well financially despite the stress on a growing number of borrowers, the CFPB says. Credit card issuer profitability took a hit in 2020 during Covid but rebounded sharply in 2021.
• “Credit remains widely available and card issuers are profiting handsomely,” CFPB Director Rohit Chopra tells CNN. He says part of the problem is the need for more competition among credit card companies “so that Americans can switch their card balances to lower rates.”
• Another CFPB official offers a broader warning to borrowers about credit cards: “The industry uses rewards to get you in. You think you’re going to pay everything off every month, but sometimes things don’t go as planned … If you start carrying a balance, you have to pay a hefty price.”

A WIDENING LOOP

• CFPB officials expect the number of borrowers stuck in this doom loop to be even higher this year. The agency says interest charges have grown since mid-2021, and Americans continue to rely on credit cards as they grapple with the ongoing high cost of living. Earlier this year US credit card balances surpassed $1 trillion for the first time ever (we unpacked that for you in a previous edition of PM Plug-In).
• So what can be done? Earlier this year, the CFPB proposed a new rule that would cap credit card late fees at $8 – a major slash from the average $32 late fee seen last year. The agency wants to close a loophole that allows credit card companies to raise their fees with inflation – even though their collection costs have not gone up. The CFPB estimates the changed rule could cut late fees Americans currently pay each year from $12 billion to $3 billion.

Have you had to turn to credit cards as prices soar? Are you worried about falling into the doom loop? Share in the comments below.

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