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Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. SHARE: Adobe Stock May 06, 2022 Checkmark Bankrate logo How is this page expert verified? At Bankrate, we take the accuracy of our content seriously. "Expert verified" means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced. Their reviews hold us accountable for publishing high-quality and trustworthy content. Ted Rossman is a senior industry analyst at Bankrate.com. He focuses on the credit card industry and helps consumers maximize rewards, get out of debt and improve their credit scores. Mariah Ackary is a personal finance editor who joined the Bankrate team in 2019, excited by the opportunity to help people make good financial decisions. Send your questions to Cathleen's stories on design, travel and business have appeared in dozens of publications including the Washington Post, Town & Country, Wall Street Journal, Marie Claire, Fodor’s Travel, Departures and The Writer. Bankrate logo The Bankrate promise
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During its April 22 earnings call, American Express said that its customers spent more in March 2022 than any other month on record. Cardmembers’ spending was up 35 percent in Q1 2022 versus the comparable period in 2021. Capital One reported a 26 percent year-over-year increase in purchase volume. And Chase noted a 21 percent year-over-year increase during its first-quarter earnings call (credit and debit cards combined), adding that credit growth was stronger than debit. The Federal Reserve’s monthly consumer credit (G.19) reports have also exhibited sharp boosts in credit card balances. The most recent release (March 2022) showed a staggering 35.3 percent annualized increase in revolving debt (which is primarily credit card debt). That was the largest jump, in percentage terms, since April 1998. Total revolving debt is now just 0.2 percentage points below the all-time high established in Feb. 2020. A lot of this is driven by robust consumer spending, of course, but credit and debit cards have been aided by the growth of e-commerce and the ongoing migration away from cash. 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. Of late, credit cards also seem to be benefiting from a behavioral quirk: Many Americans but put larger discretionary purchases such as travel on credit cards. As the COVID-19 pandemic appears to be receding, some spending is shifting away from goods and toward services such as airline tickets and hotel stays, which tends to favor credit cards rather than debit cards. We also have to acknowledge the as a driver of increased spending and higher credit card balances. What s next for debt balances
All of this adds up to the likelihood that total credit card balances will set a new record by the middle of this year. It would take an 8.3 percent quarterly increase from the New York Fed’s reported fourth-quarter balances to surpass the previous record. That might be a bit steep for the May 10 report, but it will likely be close. Credit card balances rose 6.5 percent from the third quarter of 2021 to the fourth quarter. The latest figures reported by Amex, Capital One, Chase and the G.19 report indicate that spending growth accelerated in Q1, so it’s possible. By contrast, it took more than five years for credit card balances to find a bottom during and after the financial crisis (from a peak of $866 billion in Q4 2008 to a nadir of $659 billion in Q1 2014). Then it took almost five more years (until Q4 2018) to eclipse the previous record. That was slow motion compared with our current situation. Interest rates are rising too
Unfortunately for anyone with credit card debt, this debt is about to get even pricier. In an effort to combat inflation, the Federal Reserve raised the federal funds rate by 25 basis points in March and . That’s just the beginning. Investors are pricing in additional increases that are most likely to total around 200 more basis points by the end of the year, according to the . These higher rates generally filter through to credit cardholders within a month or two and pertain to existing balances as well as new purchases. Later this year, the cumulative effect should bring the (currently 16.41 percent, according to Bankrate) well over 18 percent. To date, the record is 17.87 percent (set in April 2019). At the time, the prime rate (which is generally three percentage points higher than the federal funds rate) was 5.5 percent, so the average margin was 12.37 percent (17.87 minus 5.5). The prime rate just increased from 3.5 percent to 4 percent, but since it’s going to take a little time to work its way through the system, a more apples-to-apples comparison indicates that the recent average margin was 12.91 percentage points (16.41 minus 3.5). If the prime rate ends the year at 6 percent and the average margin remains about the same, the average credit card rate might even be knocking on the door of 19 percent once the dust settles. Experian says the is $5,525. If you make minimum payments at 16.41 percent, it will take you 195 months to pay off the entire amount, and you’ll end up paying a total of $6,276 in interest. At 18.91 percent, it will take six more months and require $1,040 in additional interest payments. What you should do
My top tip for people carrying debt is to sign up for a . These offers last as long as 21 months and can save you a ton of money in interest. I mentioned the ugly minimum payment math earlier. But even carrying a $5,525 credit card balance for 21 months at 16.4 percent isn’t pretty. That would run up a total interest bill of $868 and would require monthly payments of approximately $304. By contrast, with a 0 percent balance transfer card, you could make 21 equal payments of about $275 to knock out that $5,525 without paying any interest (factoring in the typical balance transfer fee of 3 to 5 percent, which represents $166 to $276 on a $5,525 balance). Still, that’s well worth it as long as you can pay off your debt within the allotted time. Here are my favorite balance transfer cards: : Up to 21 months from account opening with a 0 percent interest rate on qualifying balance transfers and new purchases (as long as all payments are made during the intro and extension periods). Beyond that, the variable APR is 15.99 percent to 27.99 percent. There’s a reduced balance transfer fee of 3 percent ($5 minimum) within the first 120 days. It increases to 5 percent after that. : 0% intro APR for 21 months on balance transfers from date of first transfer and 0% intro APR for 12 months on purchases from date of account opening. After that the variable APR will be 15.99% – 26.74%, based on your creditworthiness. Balance transfers must be completed within 4 months of account opening. : 0% intro APR for 21 months on balance transfers from date of first transfer and 0% intro APR for 12 months on purchases from date of account opening. After that the variable APR will be 16.99% – 27.74%, based on your creditworthiness. Balance transfers must be completed within 4 months of account opening. Some good news
While record-high credit card balances and interest rates are troubling statistics, the glass is half-full in some respects. and as a percent of disposable personal income are both near record lows. Plus, the share of credit card holders is close to a record high. “While a prolonged, elevated inflation environment will negatively impact many consumers, serious delinquency rates will generally not rise above levels seen prior to the pandemic, even under worst-case inflation scenarios,” said Charlie Wise, senior vice president and head of global research and consulting at TransUnion. “Furthermore, consumer credit markets will likely see more positive credit behavior once inflation abates.” The bottom line
Still, there are warning signs on the horizon. All news is local, and for the roughly half of credit cardholders who are carrying expensive balances from month to month, the burden is growing. Higher costs and higher interest rates could send credit card balances off to the races. This could create a vicious cycle that causes consumers to fall behind on payments or cut discretionary spending, both of which could prove problematic for our consumer-driven economy. Have a question about credit cards? E-mail me at and I’d be happy to help. SHARE: Ted Rossman is a senior industry analyst at Bankrate.com. He focuses on the credit card industry and helps consumers maximize rewards, get out of debt and improve their credit scores. Mariah Ackary is a personal finance editor who joined the Bankrate team in 2019, excited by the opportunity to help people make good financial decisions. Send your questions to Cathleen's stories on design, travel and business have appeared in dozens of publications including the Washington Post, Town & Country, Wall Street Journal, Marie Claire, Fodor’s Travel, Departures and The Writer. Related Articles