Inflation is coming down, underscored by the latest Consumer Price Index reading of 4.9% through April. But interest rates on credit cards keep moving higher.
Credit cards now charge a record-high 20.3% rate on average, according to a Bankrate.com tally from May 10. Plus, unpaid balances are climbing, heightening the importance of getting your personal debts under control.
While the inflation trend bodes well, it hasn’t done much to ease the pressures on cardholders.
“Almost all credit cards set rates based upon the Prime Rate plus the card issuer’s profit margin,” Bankrate.com senior analyst Ted Rossman wrote in an email.
Given that the Federal Reserve has pushed up the prime and other rates to contain inflation, Rossman doesn’t expect much improvement on credit cards anytime soon. “Even if rates were to fall back to 20% or even 19% or 18%, that wouldn’t provide all that much relief,” he added.
Consumers in general haven’t gotten the message — or haven’t had the ability to act on it.
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Overall card balances of $917 billion are up nearly 20% over the past year, TransUnion reported. Balances typically show a seasonal drop in the first quarter as consumers apply tax refunds to pay down debts. Yet refunds this filing season were lower than last year, and average card balances have risen.
The average debt per cardholding borrower, at $5,733, is up from $5,010 in March 2022, TransUnion reported.
Consumers dealing with more credit and money stress
Many Americans are reporting more stress over money matters, including anxiety over credit cards and other debts. More than half of respondents to a recent Bankrate.com survey, 52%, said money concerns are leading to anxiety, sleepless nights or other mental health strains. That’s up from 42% last year. More than 2,300 people responded to the latest poll.
“Despite a strong job market, wage growth has not kept pace with the rising cost of living,” Rossman said.
To pare credit card debts, he suggests looking into offers to transfer such debt to other card issuers. Many card providers offer 0%-interest balance-transfer promotions that last for a specified period, often 12 to 21 months, before the regular rate kicks in.
If possible, he also suggests putting aside money on a regular basis. “Every paycheck, aim to have some money automatically transferred into a retirement savings plan and other funds diverted into a high-yield savings account,” he said. “Then try to gradually increase those contributions.”
Key methods for debt-cutting momentum
Kyle Enright, president of Achieve Lending, offers other tips to get credit-card balances under control. These include making a definitive plan, budgeting and seeking help from your credit card issuer such as by setting up payment plans, deferring payments and possibly reducing interest (though most companies won’t waive debt).
“With persistent inflation on the heels of the pandemic, many (card issuers) are willing to work with customers,” Enright said.
If you have lingering balances on more than one card, try one of two strategies, he suggests.
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The first is the “snowball” approach, where you rank your debts from smallest to largest, then pay the monthly minimum owed on each debt.
With the smallest balance, you also pay as much over the minimum that you can. When you have paid off that card, you move to the one with the next smallest balance until that one is paid off, too. This approach works well for people seeking momentum in reducing the number of accounts on which they owe balances.
The second, or “avalanche,” method starts with ranking cards by the amount of debt and interest rate on each.
You would pay the monthly minimum on all while applying as much extra cash to the card carrying the highest interest rate. When that one is paid off, you would apply extra payments to the card with the next highest rate, and so on. The avalanche method gets you out of debt quicker while saving more money overall, Enright said.
Lower late fees, but other possible fallout
A government proposal to cut late fees on credit cards sounds good, but banking and credit union groups are pushing back on it.
The federal Consumer Financial Protection Bureau is seeking to compel credit card companies to implement late fees that are “reasonable and proportional” to the costs companies incur to collect late payments. The agency wants to see late fees cut to around $8 per incident from as much as $41.
But the American Bankers Association, the Consumer Bankers Association and National Association of Federally Insured Credit Unions said the proposal could harm all cardholders, including the majority who pay on time.
“Cardholders who pay at least their minimum payment in a timely manner will pay more for existing and new credit because issuers will have to adjust rates and fees to manage new risks and recover costs (including potential losses) related to late payments,” the groups said in a comment letter.
The proposal, they add, would give “preferential treatment to a small minority of frequently late-paying consumers at the expense of the vast majority of consumers who pay their bills on time.”
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