Plastic promises: Americans are drowning in credit card debt

The Federal Reserve Bank of New York says that Americans owe a record of $1.14 trillion on their credit cards. The Consumer Financial Protection Bureau says that credit card companies earned an estimated $25 billion in interest revenue last year. But how have we got to this point and what role do credit card companies play in this? Ayelet Sheffy is Senior Economic Policy Reporter for Business Insider. She has recently written an in-depth story on this topic. Ayelet, how do credit card companies benefit from growing consumer debt and late payments? Yeah, absolutely. So I think a key thing we're seeing here right now is that credit card companies are just becoming more and more profitable. So as you said, credit card balances are at a record high right now, and this is primarily due to the high interest rates that credit card companies are charging. So they can essentially charge, you know, upwards of 21 percent on interest, which is currently the average in the U.S., and they can continue to profit off of the interest that they're charging consumers. And this can cause a lot of consumers to really, you know, have difficulties paying off their balances, go into debt, make it difficult for them to stay on top of their balances while these credit card companies are continuing to make money off of these continued high interest rates. And are credit card interest rates tied to interest rates set by the Federal Reserve? So the interesting thing that we're seeing here right now is that the spread between the federal funds rate and the rate that credit card companies pay is at its highest in about 30 years. So what this means is that credit card companies can essentially charge whatever they want despite what the Federal Reserve sets on interest rates. And this really allows credit card companies to continue to generate profit because they have such minimal regulation over how much they can be charging consumers. Goodness. How are they able to attract consumers in the first place? That's a great question. I think that oftentimes when all of us are looking at a new credit card, looking at what the options are, credit card companies really put those rewards, those travel perks, all sorts of, you know, glitzy things up front to really pull the consumer in. And what these companies are not advertising are those high interest rates. So oftentimes they'll, you know, advertise a zero percent APR for maybe the first year. They'll offer consumers all sorts of rewards, all sorts of perks, cash back. But once the consumer signs that contract, signs onto that credit card, they might not even know how high these interest rates will be. So companies have gotten really good at pulling consumers in. All right. Once we get to that point, how can we try to pull ourselves out of credit card debt or just avoid this mess in the first place? So I think a key thing, you know, is just budgeting, being aware of how much you're spending, being aware of what your interest rate is as well. So you know what the consequences are if you fall behind. You know, we have other financial experts suggesting some sorts of debt payoff strategies like a debt snowball where you pay off your smallest balance first and continue to pay off your larger balances. So there are a lot of options out there. You know, you can also look into consolidation. So you're paying your debt at a single interest rate. But I think the key thing here is for consumers to just be aware of the conditions of their credit cards. Make sure you look into those terms. Make sure you look into those interest rates and ensure that if you do fall behind on payments, you can afford paying it off. All right. Great information. One more question. What can we do to boost our credit score? So I think just ensure that you're staying on top of your payments. Make sure that every time you get that credit card bill each month, you are paying that off. Try not to fall behind. Just ensure that you're really aware of your spending and you're aware of your budget and you're making those payments on time. Ayelet Shafi, great information. Thank you so much for joining us here on Daybreak. We will make sure to get a lot of this information on our website, wishtv.com.