For many Americans, the pandemic-induced downturn has presented a rare opportunity to improve their financial situation.
Government stimulus checks and dwindling spending opportunities have driven the personal savings rate to a level not seen since World War II, with many consumers using the extra money to pay off debts – mainly their card balances loans, which have the highest interest rates, on average more than 16%.
In total, consumers have paid off a record $83 billion in debt on their credit cards during the pandemic, but recent spikes in the prices of gas, groceries and housing, among other necessities, are forcing people to start accumulating high balances on their cards again.
The Federal Reserve’s monthly credit report found that revolving credit, which primarily includes credit card balances, jumped nearly 20% in April from the previous month to $1.103 trillion, beating the pre-pandemic record $1.1 trillion.
Meanwhile, credit card balances are also growing year-over-year, reaching $841 billion in the first three months of 2022, and are expected to continue to rise, according to a separate Federal Reserve Bank report. from New York.
Rising credit card borrowing, along with car loans, student debt and mortgages, has now pushed total household debt to a record $15.84 trillion.
“A big drop and then a big rise”
“We got our new all-time high – it only took 11 months for revolving debt to bottom out and then 15 months from there to climb back to a new high,” said Ted Rossman, senior analyst. of the industry at CreditCards.com.
“After the financial crisis, it took almost 10 years from peak to peak,” Rossman said. “It’s definitely been a V-shaped curve – a big drop and then a big rise.”
“But it’s not all bad news,” he added. “Part of that reflects rising consumer spending, which is good for the economy.”
But the downside for consumers is that credit cards are one of the most expensive ways to borrow money.
Learn more about personal finance:
Some medical debt will soon disappear from credit reports
Emergency savings hit as households adjust finances
What Financial Advisors Would Tell Their Young People Themselves
And as the Federal Reserve raises interest rates to rein in inflation, which is at its fastest pace in more than 40 years, maintaining a balance month after month will soon cost even more than it does today. today.
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, so does the prime rate, and credit card rates follow. Cardholders typically see the impact within a billing cycle or two.
Annual percentage rates currently average 16.61%, but could be closer to 19% by the end of the year, which would be an all-time high, Rossman said.
The current record is 17.87%, set in April 2019.
If the annual percentage rate on your credit card increases by two percentage points from its current level, it will cost you an additional $832 in interest charges over the term of the loan, assuming you have made minimum payments on an average balance of $5,525, he calculated.
Moreover, it would take more than 16 years to pay off the balance.
“The biggest problem isn’t the monthly payments, it’s the cumulative effect of paying a high rate over a long period of time,” Rossman said.
If you have a balance, try consolidating and paying off high-interest credit cards with a low-interest home equity loan or personal loan, or switch to a balance transfer credit card without interest, he advised.
Subscribe to CNBC on YouTube.