Consumers are buying more plastic — and paying more for it.
Rising prices have suddenly left many Americans feeling strapped and more dependent on credit cards to make ends meet.
After consumers paid off $83 billion in credit card debt during the pandemic, aided by government stimulus controls and fewer discretionary shopping opportunities, credit cards have risen amid rising prices for gas, groceries, housing and other essentials The balance rose again.
Overall, credit card balances increased by $52 billion in the fourth quarter of 2021, the largest quarterly increase in the data’s 22-year history, according to a new report from the Federal Reserve Bank of New York.
Total credit card debt is on track to surpass pre-pandemic levels and hit an all-time high this summer, said Ted Rossman, senior industry analyst at CreditCards.com.
“After the Great Recession, it took years for credit card debt to bottom out and then years to return to all-time highs,” Rothman said. “Everything about Covid feels like it’s fast-forwarding.”
At the same time, the Federal Reserve has pledged to raise interest rates to curb inflation, which is now at its fastest pace in more than 40 years.
Since most credit cards have variable rates, there is a direct link to the Fed’s benchmark. When the federal funds rate goes up, the federal funds rate goes up, and so does the credit card rate. Cardholders will see the impact within a billing cycle or two.
So if you have a line of credit on your credit card, you will soon have to pay more to cover the interest.
If the Federal Reserve announced a 50 basis point rate hike in May, as expected, consumers with credit card debt would pay an additional $3.3 billion in interest this year alone, according to a new analysis by WalletHub.
According to Experian, the average consumer has a credit card balance of $5,525 with an annual interest rate of about 16.38%, which is cheap by historical standards but far higher than almost any other consumer loan.
With several rate hikes looming, credit card rates could hit another record high of 18.5% by the end of the year, Rothman said.
If the APR on your credit card increases from 16.38% in 2022 to 18.5%, assuming your minimum payment is $5,525, that will cost you an additional $885 in interest charges over the life of the loan. He counted dollars.
“People really need to focus on paying off their credit card debt as quickly as possible because it’s only going to get more expensive, and it’s going to get pretty expensive very quickly,” 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 your high-yield credit card with a lower-yielding home equity loan or personal loan, or switch to an interest-free credit card balance transfer, Schultz recommends .
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