For most Americans, inflation and rising interest rates are a one-two punch.
On the heels of another rate hike this week by the Federal Reserve, credit card annual percentage rates have been close to 20%, on average, and are set to rise even higher. At the same time, more consumers are relying on credit to meet increasingly expensive needs, such as food and rent.
That helped total credit card debt hit a record $930.6 billion by the end of 2022, up 18.5% from a year ago, according to the latest quarterly report by TransUnion.
The average balance increased to $5,805 during the same period, TransUnion found.
At nearly 20%, if you make the minimum payment on this average credit card balance, it will take you more than 17 years to pay off the debt and cost more than $8,213 in interest, Bankrate calculated.
“Whether it’s shopping for a new car or buying eggs at the grocery store, consumers continue to be affected in ways big and small by high inflation and interest rate hikes by the Federal Reserve,” said Michele Raneri, US vice president. research and consulting at TransUnion.
Overall, an additional 202 million new credit accounts were opened in the fourth quarter, led by origins among Generation Z, or adults aged 18 to 25, and the number of credit cards reached a record 518.4 million.
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As the number of credit card accounts in the US increases, more new customers are subprime borrowers, generally speaking those with credit scores of 600 or below, according to TransUnion, in part because a flood of young borrowers are gaining access to credit cards.
But at the same time, delinquencies are rising as lenders expand access to less experienced credit users, the report found. TransUnion defines delinquency as a payment that is 60 days or more late.
“The increase in arrears should be watched out for,” said Raneri. As long as unemployment remains low, households are better able to pay their bills, he said. “If unemployment rises, and we see a spike in delinquencies, then this indicates a long-term problem.”
Today, the unemployment rate is at a 53-year low, following a better-than-expected January jobs report.
How to deal with high interest credit card debt
“But cardholders have options,” said Matt Schulz, principal credit analyst at LendingTree. Zero-percent balance transfer credit card offers are even more popular than a year ago and remain one of the best weapons Americans have in the fight against credit card debt, he said.
Borrowers may be able to refinance into a lower-cost personal loan. Those rates have also recently fallen, but at an average of 10%, they’re still below what you currently have on your credit card, according to Schulz.
If not, go back to basics, advises Ted Rossman, senior industry analyst at Bankrate.
“By the way, sell things you don’t need, reduce your costs,” he said. “A dollar saved is a dollar earned, and every dollar of credit card debt you pay off has an average tax-free return of about 20%.
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