Inflation and High Interest Rates Drive Up Credit Card Debt
Americans are finding themselves burdened with increasing credit card debt as the cost of essential goods and services continues to rise due to persistent inflation and steep interest rates. The New York Federal Reserve Bank’s Quarterly Report on Household Debt and Credit, set to be released on Tuesday, is anticipated to reveal a new record in credit card debt during the three-month period from October to December. According to Matt Schulz, chief credit analyst at LendingTree, this surge in debt is expected to surpass the previous high of $1.08 trillion.
“I’d be surprised if credit card debt didn’t go up in the fourth quarter, and possibly by a good amount,” Schulz expressed to FOX Business. “Because historically, we’ve seen that the biggest quarterly increases each year has been [in the fourth quarter].” This marks a significant shift from just three years ago when households were actively reducing their credit card debt with the aid of stimulus payments received during the COVID-19 pandemic.
Inflation Crisis and Increased Reliance on Credit Cards
The ongoing inflation crisis is one of the key factors driving consumers to increasingly rely on credit cards to cover their expenses. “Holiday spending certainly plays a role, no question about that. But also, life was expensive in 2023, and continues to be in 2024,” Schulz noted. “So I’m sure that inflation and rising interest rates are playing a significant role. As prices rise, a lot of people lean on credit cards as a kind of de facto emergency fund.”
Although inflation has reduced significantly from its peak of 9.1% in June 2022, it still exceeds the Federal Reserve’s 2% target. Furthermore, when compared to January 2021, just before the onset of the inflation crisis, prices have surged by a staggering 17.6%.
Financial Strain on U.S. Households
The high inflation rates have placed severe financial strain on the majority of American households, as they are forced to allocate more funds towards everyday necessities such as food and rent. Calculations by FOX Business reveal that food prices have risen by 33.7% since the beginning of 2021, while shelter costs have increased by 18.7%. Energy prices have also seen a significant surge of 32.8%.
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The rise in credit card usage and debt is particularly alarming given the astronomical interest rates prevailing at present. According to a Bankrate database dating back to 1985, the average credit card annual percentage rate (APR) has reached a record high of 20.74%. The previous record of 19% was set in July 1991.
Carrying debt to compensate for higher prices may result in individuals paying more in the long run. For example, the average American with a debt of $5,000 would need approximately 279 months and $8,124 in interest to repay the debt by making minimum payments based on current APR levels.
Exploring Options to Manage Credit Card Debt
Schulz advises credit card holders burdened with debt to explore various options. These include contacting their credit card providers and requesting a lower APR, considering a 0% balance transfer credit card, reassessing their budget to tackle the debt more effectively, exploring high-yield savings accounts to benefit from higher interest rates, and focusing on improving their credit score.