Worrisome Trend Emerges Among Credit Card Holders

A new report released Thursday revealed that Americans have the highest credit card debt levels in decades. It is now nearing $1 trillion.

A report by the Federal Reserve Bank of New York discovered that “credit card balances increased by $61 billion to reach $986 billion, surpassing the pre-pandemic high of $927 billion” In the fourth quarter. At the same time, delinquencies among borrowers accelerated in the same time period, according to the report.

“Although historically low unemployment has kept consumer’s financial footing generally strong, stubbornly high prices and climbing interest rates may be testing some borrowers’ ability to repay their debts,” Wilbert van den Klaauw is an economic advisor at the New York Fed.

Younger borrowers are more likely to struggle to repay auto and credit card debts.https://libertystreeteconomics.newyorkfed.org/2023/02/younger-borrowers-are-struggling-with-credit-card-and-auto-loan-payments/”>according To a New York Fed post.

The average credit card rate is near 20 percent—at 19.91 percent—according to a Bankrate Update issued on Feb. 15. Credit card rates move in tandem with the the Federal Reserve’s benchmark interest rate, which the central bank has been increasing to deal with high inflation.

“Americans have been facing higher prices everywhere … including on purchases they may be putting on their credit cards—at the grocery store, at the gas pump, and for many other types of goods,” New York Fed researchers wrote in an article.

“It is possible that increasing prices—and correspondingly, debt service payments—are cutting into borrowers’ balance sheets and making it more difficult for them to make ends meet, particularly as real disposable income fell in 2022,” The post has been added.

Other Debt

It comes as total household debt rose to $16.90 trillion in the same time period, increasing $394 billion, or about 2.4 percent, according to the New York Fed’s Report. At the same time, mortgage balances rose to $11.92 trillion, car loan balances rose to $1.55 trillion, and student loan balances increased to $1.60 trillion.

“The share of current debt transitioning into delinquency increased for nearly all debt types,” the report said, while the Fed’s blog post said that the overall debt increase is the “largest nominal quarterly increase in twenty years.”

Analysts believe that the increase in overall debt is due to the turbulent 2022, when the U.S. central banks raised its benchmark rate from nearly zero last March to over 4 percent by December last year. This was the fastest pace of tightening monetary policy since the 1980s. Rates have been increased in a bid to deal with inflation rates that haven’t been seen in 40 years.

According to the Fed’s statement, it has sought to reduce demand in order to heat the economy. The economy was badly out of balance in early 2013, with too much money chasing down too few properties and too many goods. There were also labor shortages in several sectors.

On March 18, 2020, people walked in masks to the Federal Reserve Bank of New York. (Lucas Jackson/Reuters)

The Fed has now raised its policy interest rate and is currently at 4.50 to 4.75 percent. Investors are expecting at least two more 25-basis point increases before the Fed stops to allow its actions through the economy to lessen the risk of it going into recession.

How to deal with credit card debt

American cardholders averaged $5,221 in balance in 2021.https://www.experian.com/blogs/ask-experian/state-of-credit-cards/”>according Experian, a credit reporting agency, in a recent study.

An article by Reuters a href=”https://www.reuters.com/markets/wealth/us-interest-rates-soar-four-ways-manage-credit-cards-now-2022-08-22/”>recommends that for those in debt, they should call up their lender and see if they can get a lower rate—something more likely to happen if debtors are longtime cardholders in good standing, and not someone who makes late payments or is bumping against credit limits.

You can also arrange for a balance transfer to your new card to cut those high-interest rate rates. While one will have to repay the balance, there is still an option to enjoy a prolonged introductory period of zero percent interest.

Be careful with balance transfers, as it can cause credit problems. According to Ed Mierzwinski (senior director, federal consumer program, advocacy organization U.S. PIRG), closing old accounts and opening new accounts is not a good way to improve your credit score.

Many cardholders will simply pay the minimum amount when they receive their monthly statements. But they are playing right into lenders’ hands—leading to interest income that makes the banks about $100 billion a year, according to the Consumer Financial Protection Bureau.

For example, a $10,000 loan on a card at a 20% rate will result in a small monthly payment for $200. This will add $11,000 to your interest over the life of the debt. It will take you 106 months to repay. Don’t carry any monthly balances, but go above the minimum.

Mierzwinski added that cardholders should be careful with their points and rewards programs.

“If you are getting a 1-to-2 percent reward, that’s completely offset by cost of carrying a balance at an interest rate like 15-to-25 percent, or even higher,” He said. “People are being manipulated into using their cards more and more—and the credit card companies are laughing all the way to the bank.”

This report was compiled by Reuters

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