Consumer
credit card debt and annual percentage rates are heading to an all-time high
To
keep up with rising prices, many consumers are leaning on their credit
cards.
Credit
card balances rose year over year, reaching $841 billion in the first three
months of 2022, according to data released Tuesday from the Federal Reserve
Bank of New York.
Although
balances fell slightly from where they stood at the end of 2021 following the
peak holiday shopping season, they are expected to keep going up from here,
according to researchers at the New York Fed.
“There’s
a good chance that Americans’ total credit card balances will soon reach a new
record high, marking a sharp reversal from the precipitous drop that occurred
in 2020 and early 2021,” said Ted Rossman, a senior industry analyst at
CreditCards.com.
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An
additional 229 million new credit card accounts were also opened in the first
quarter, up from the previous quarter and higher than prepandemic
levels.
Many
accounts were closed during the pandemic, so it’s not surprising to see more
new accounts now, according to researchers at the New York Fed.
However,
the rise in borrowing, together with auto loans, student debt and mortgages,
propelled total household debt to a record $15.84 trillion at the beginning
of the year.
After consumers paid off $83 billion in credit card debt during
the pandemic, helped by government stimulus checks and fewer opportunities
for discretionary purchases, credit card balances have steadily ticked back up
amid higher prices for gas, groceries and housing, among other necessities.
“A lot of this is being driven by robust
consumer spending, of course, but credit and debit cards have both been aided
by the growth of e-commerce and the ongoing migration away from cash,” Rossman
said. “This is great if you can pay in full, avoid interest and earn rewards,
but potentially very costly if you’re paying interest every month.”
In fact, credit
card rates will only head higher as the Federal
Reserve hikes interest rates as it looks to tamp down inflation,
which is running at its fastest pace in more than 40 years.
Since most credit cards have a
variable annual percentage rate, there’s a direct connection to the Fed’s
benchmark.
APRs are currently just over 16%, on
average, but may be well over 18% by the end of the year — which would be an all-time record, according to Rossman.
To date, the record is 17.87%, set in April
2019.
“With rampant inflation and rising
interest rates, things are going to get worse before they get better,” said
Matt Schulz, chief credit analyst for LendingTree.
If you’re carrying a balance, try calling
your card issuer to ask for a lower rate, consolidate and pay off high-interest
credit cards with a lower interest home equity loan or personal loan or switch to an
interest-free balance transfer credit card, he advised.
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“Consumers need to act now to knock down
that credit card debt because it is only going to get more expensive — and in a
hurry,” Schulz said.
To build better credit card habits, make
sure to pay off your balance on time and in full every month and only make
purchases you can afford to pay back, noted Holly O’Neill, president of retail
banking at Bank of America.
“Spending within your means will leave
more money at the end of every month and help reduce your debt,” she said. “As
an added bonus, spending less than your limit allows will also help you build a
stronger credit score.”
(Here’s why your credit score matters and five ways to
improve it.)