As interest rates rise on everything from mortgages to car loans to Treasurys, interest is also rising on credit card debt.
That’s not exactly great news, as so many indicators point to a recession—and the worsening job situation that comes with it—on the horizon. Many Americans may soon find themselves with more debt and higher interest rates, all while real wages are falling.
Earlier this month, Bankrate.com reported that the average credit card interest rate has climbed to 19.04 percent. That’s a thirty-year high and the highest rate since 1991, when the rate hit 19.00 percent. That can mean real financial trouble for ordinary households, but it’s what we should expect in the wake of the Federal Reserve’s policy shift to finally allow interest rates to drift upward this year after more than a decade of quantitative easing and ultralow interest rates. Over the past year, the Fed has increased the target federal funds rate from 0.25 percent to 4.00 percent. NBC reports on how this affects credit card debt:
Increasing the federal funds rate cranks up what’s known as the prime rate. That’s the interest rate banks charge their most creditworthy customers. Currently, it is 7%. The final annual percentage rate for a credit card is determined by the prime rate plus a bank’s margin for lending to a given customer.
The new average is a substantial increase from the 16.3% average rate for credit cards at the beginning of the year. According to Bankrate, if you carry a $5,000 balance on a credit card—which is the current national average—making just the minimum payment each month at that rate would cost $5,517 in interest over 185 months, or about 15 years. At today’s 19.04% rate, you would pay $6,546.
The Fed also reported that “the strength in credit card demand and access coincided with the record growth in credit card balances over the past year.” In its third-quarter report on household debt, the Fed further noted, “Credit card balances saw a $38 billion increase since the second quarter, a 15% year-over-year increase” and “the largest in more than 20 years.”
Consumers apparently expect to be spending more with credit cards in the near future as well, as many are applying for even more consumer credit. According to a new report released by the New York Federal Reserve on Monday, Americans are pursuing less mortgage and auto debt, but continue to turn to credit cards:
The application rate for credit cards remained robust during 2022, reaching 27.1% in October 2022, above its October 2021 level of 26.5% and its pre-pandemic reading of 26.3% in February 2020. The average application rate for credit cards for 2022 overall was 26.7%, 3.6 percentage points higher than the average rate for 2021.
Should we be worried about this? Fed economists would tell you no. They assume that Americans have a huge savings stockpile that they can use to pay down debt or to avoid default. Yet this casual attitude toward mounting debt appears less and less warranted every day. With the job market softening, real wages falling, and interest rates rising, increasing debt can’t so easily be waved off.
This episode is also available as a blog post: http://freedomreportage.com/2022/11/27/after-years-of-stimulus-come-surging-debt-and-falling-wages/
