To keep up with rising prices, many consumers rely on credit cards.
Credit card balances rose year-over-year, reaching $841 billion in the first three months of 2022, according to data from the Federal Reserve Bank of New York released Tuesday.
Although balances have fallen slightly since the holiday shopping season in late 2021, they are expected to continue to rise, according to researchers at the New York Fed.
“It’s very likely that Americans’ total credit card balance will soon hit an all-time high, clearly reversing the sharp decline seen in 2020 and early 2021,” said Ted Rossman, senior industry analyst at CreditCards.com.
There were also 229 million new credit card accounts opened in the first quarter, up from the previous quarter and higher than before the pandemic.
Many accounts have been closed during the pandemic, so it’s no surprise to see more new accounts now, according to researchers at the New York Fed.
However, a surge in borrowing, combined with auto loans, student debt and mortgages, has pushed total household debt to a record $15.84 trillion at the start of the year.
After consumers paid off $83 billion in credit card debt during the pandemic, credit card balances rose amid rising prices for gas, groceries, housing and daily necessities, aided by government stimulus controls and reduced discretionary shopping opportunities increase steadily.
“Much of this is of course driven by resilient consumer spending, but both credit and debit cards are supported by the growth of e-commerce and the continued migration away from cash,” Rothman said. “It’s great if you can pay in full, avoid interest and earn premiums, but if you pay interest every month, the cost can be very high.”
In fact, credit card rates will only rise, the fastest in more than 40 years, only if the Fed raises rates to curb inflation.
Since most credit cards have variable APRs, there is a direct link to the Fed benchmark.
The APR is currently averaging a little over 16%, but could top 18% by the end of the year — which Rothman said would be an all-time record.
The record so far is 17.87% set in April 2019.
“With inflation rising and interest rates rising, things are going to get worse before they get better,” said Matt Schultz, chief credit analyst at LendingTree.
If you have a balance, try calling your card issuer and ask for a lower interest rate, consolidate and pay off a high-yield credit card with a lower-yielding home equity loan or personal loan, or switch to an interest-free credit card balance transfer, he advises.
“Consumers need to act now to get out of credit card debt because it’s only going to get more expensive — and in a hurry,” Schultz said.
Holly O’Neill, president of retail banking at Bank of America, points out that to develop better credit card habits, make sure you pay off your balance in full and on time each month, and only buy what you can afford.
“Living within your means gives you more money at the end of each month and helps reduce your debt,” she said. “As an added bonus, spending below the limit can also help you build a stronger credit score. ”