Here’s how inflation and interest rates can impact your credit card debt

ByRichard C. Sloan

Apr 27, 2022

Consumers buy more plastic and pay more for this privilege.

Rising prices have caused many Americans to suddenly feel strapped for money and more reliant on credit cards to make ends meet.

After consumers paid off record $83 billion in credit card debt during the pandemic, helped by government stimulus checks and fewer discretionary shopping opportunities, credit card balances are rising amid higher prices for gasoline, groceries, and housing, among other necessities.

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Overall, credit card balances increased by $52 billion in the fourth quarter of 2021, recording the largest quarterly increase in 22 years of data history, according to the latest report from the Federal Reserve Bank of New York. York.

Now, total card debt is on track to surpass pre-pandemic levels and hit an all-time high as early as this summer, according to Ted Rossman, senior industry analyst at

“After the Great Recession, it took years for credit card debt to bottom out, and then years to get back to an all-time high,” Rossman said. “Everything about Covid feels like it was fast forward.”

At the same time, the Federal Reserve has pledged to raise interest rates to bring inflation under control, which is now at its fastest pace in more than 40 years.

Since most credit cards have a variable rate, there is a direct link to the Fed’s benchmark index. As the federal funds rate rises, the prime rate also rises, and credit card rates follow. Cardholders see the impact within a billing cycle or two.

That means anyone with a balance on their credit card will soon have to shell out even more just to cover interest charges.

If the Fed announces a 50 basis point hike in May, as expected, consumers with credit card debt will spend an additional $3.3 billion in interest this year alone, according to new analysis from WalletHub.

The average consumer has a credit card balance of $5,525, according to Experian, and pays an annual percentage rate of around 16.38%, which is cheap by historical standards but significantly higher than almost any other consumer loan.

With several rate hikes on the horizon, credit card rates could hit 18.5% by the end of the year, another all-time high, Rossman said.

If your credit card APR drops from 16.38% in 2022 to 18.5%, it will cost you an additional $885 in interest charges over the life of the loan, assuming you made minimum payments on a balance of $5,525, he calculated.

“People really need to focus on getting that credit card debt down as soon as possible because it’s only going to get more expensive and it’s going to get a little more expensive quickly,” said Matt Schulz, chief credit analyst for LendingTree. .

If you have a balance, try calling your card issuer to ask for a lower rate, consolidate and pay off high interest credit cards with a low interest home loan or personal loan or switch to an interest-free balance transfer credit card. , advised Schulz.

Zero percent balance transfer offers are considered the best tool to pay off debt and save hundreds or thousands of dollars in interest while you can, experts say.

Cards offering 15, 18, and even 21 months interest-free on transferred balances “still exist, but assuming rates go up as fast as expected, there’s only been so long these deals will stay as good as they look.” are now.” Schulz added.

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