For many Americans, the recession caused by the pandemic has presented a rare opportunity to improve their financial situation.
Government stimulus checks and fewer spending opportunities have pushed personal savings rates to levels not seen since World War Two, with many consumers using the cash they have to pay off debt – mainly their credit card balances, which have the highest interest rates, averaging over 16%.
In general, consumers Paying off a record $83 billion in credit card debt during the pandemic, but recent spikes in the prices of gas, groceries and housing, along with other necessities, are making most of them rely on credit once again.
Federal Reserve monthly credit report found that revolving credit, which mainly consists of credit card balances, rose nearly 20% in April from the previous month to $1.103 trillion, breaking the pre-pandemic record of $1.1 trillion. .
Meanwhile, credit card balances are also growing year-over-year, reaching $841 billion in the first three months of 2022 and are expected to continue to climb higher, according to a separate report from the Federal Reserve Bank of New York. York.
An increase in credit card loans, along with auto loans, student debt and mortgages, has now pushed total household debt to a high. record 15.84 trillion dollars.
“A big drop and then a big increase”
“We hit our new record – it took just 11 months to turn around debt and then 15 months to climb back to new highs,” said Ted Rossman, senior industry analyst at CreditCards.com.
“After the financial crisis, it took almost 10 years from peak to peak,” says Rossman. “This is definitely a V-curve – a big drop and then a big increase.”
“But it’s not all bad news,” he added. “Some of this reflects rising consumer spending, which is good for the economy.”
However, credit cards are already one of the most expensive ways to borrow money.
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Like Federal Reserve get a raise interest rate To tame inflation, which is running at its fastest pace in more than 40 years, it will soon cost even more to exercise a balance.
Since most credit cards have variable rates, there is a direct correlation with the Fed’s benchmark. As the federal funds rate rises, so does the prime rate, and so does the credit card rate. Cardholders typically see the impact in a billing cycle or two.
The annual percentage rate currently averages 16.61%, but could be closer to 19% by year’s end – will be an all-time recordaccording to Rossman.
To date, the record is 17.87%Set in April 2019.
If your credit card’s APR goes up two percentage points from its current level, you’ll pay an additional $832 in interest fees over the life of the loan, assuming you make the minimum payments on your credit card. average balance is $5,525, he calculates.
In addition, it will take more than 16 years to pay off.
“The biggest problem isn’t the monthly payments, it’s the cumulative effect of paying too much interest over a long period of time,” says Rossman.
If you have a balance, try consolidating and paying off a high-interest credit card at a lower interest rate home loans or personal loan or switch to an interest-free balance transfer credit card, he advises.
