This is how inflation, interest rates can affect your credit card debt

Consumers buy more plastic – and pay more for the privilege.

Rising prices have made many Americans suddenly feel cramped and more dependent on credit cards to make ends meet.

After consumers paid off a record $ 83 billion in debt during the pandemic, aided by government stimulus checks and fewer options for discretionary purchases, credit card balances are creeping up again amid higher gas, grocery and housing prices, among other necessities.

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

Now the total card debt is on track to surpass pre-pandemic levels and reach an all-time high already this summer, according to Ted Rossman, a senior industry analyst at CreditCards.com.

“After the Great Recession, it took years for credit card debt to bottom out and then years to get back to the highest ever,” Rossman said. “Everything about Covid feels like it’s been in fast forward.”

At the same time, the Federal Reserve has committed to raising interest rates to tame inflation, which is now running at its fastest pace for more than 40 years.

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

This means that anyone who has a balance on their credit card will soon have to pay even more to cover interest costs.

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

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

With several rate hikes on the horizon, credit card interest rates could be as high as 18.5% by the end of the year, another record ever, Rossman said.

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

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

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

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 said.

Cards that offer 15, 18 and even 21 months with no interest on transferred balances “are still out there, but provided rates rise as fast as we expect them to, there is only so long that these offers remain so good as they are now, “Schulz added.

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