Credit card balances soar after stimulus checks helped reduce debt

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For many Americans, the pandemic-related slowdown presented a rare opportunity to improve their financial health.

Government stimulus checks and fewer opportunities to spend pushed personal savings rates to levels not seen since World War II, and many consumers used the cash they had on hand to pay down debt — primarily their credit card balances, which have the highest interest rates, on average more than 16%.

Overall, consumers have paid off a record $83 billion in credit card debt during the pandemic, but recent hikes in the price of gas, groceries and housing, among other necessities, are prompting most of them to lean back on their credit cards.

Those of the Federal Reserve monthly credit report found that revolving credit, which includes mostly credit card balances, rose nearly 20% mom to $1.103 trillion in April, breaking the pre-pandemic record of $1.1 trillion.

Meanwhile, credit card balances are also up year-on-year, reaching $841 billion in the first three months of 2022, and are expected to keep growing, according to a separate report from the Federal Reserve Bank of New York.

The surge in credit card borrowing, along with auto loans, student debt and mortgages, has pushed total household debt to a record $15.84 trillion.

“A big fall and then a big rise”

“We hit our new record — it took revolving debt just 11 months to bottom and then 15 months to climb from there to a new high,” said Ted Rossman, a senior industry analyst at CreditCards.com .

“After the financial crisis, it took almost 10 years from peak to peak,” Rossman said. “It was definitely a V-shaped turn – a big drop and then a big climb.”

“But it’s not all bad news,” he added. “Part of this reflects increased consumer spending, which is good for the economy.”

Nevertheless, credit cards are already one of the most expensive ways to borrow money.

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As the Federal Reserve hikes interest rates to tame inflation, which is running at its fastest for more than 40 years, it will soon cost even more to keep a balance.

Since most credit cards have a variable interest rate, there is a direct link to the Fed’s benchmark. When the federal funds rate rises, so does the federal funds rate, and credit card rates follow suit. Cardholders typically see the impact within a billing cycle or two.

The APR currently averages 16.61%, but it could be closer to 19% by the end of the year — which Rossman says would be an all-time record.

To date is the record 17.87%discontinued in April 2019.

If the APR on your credit card goes up two percentage points from where it is now, that’ll cost you an additional $832 in interest expense over the life of the loan, assuming you’ve made minimum payments on an average balance of $5,525, he calculated .

Also, it would take more than 16 years to pay for itself.

“The biggest problem isn’t the monthly payments, it’s the cumulative effect of paying a high rate over a long period of time,” Rossman said.

If you have a balance, try to consolidate and pay off high-yield credit cards with lower interest rates home loan or personal loans, or switching to an interest-free credit card with wire transfer, he advised.

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