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As daily spending remains high due to inflation, more and more Americans are turning to credit cards to make ends meet.
As the personal savings rate fell to near an all-time low, credit card balances rose 15% year over year, the largest increase in more than 20 years, according to the Federal Reserve Bank of New York’s latest quarterly report.
“With prices more than 8% higher than a year ago, it’s perhaps not surprising that balances are increasing,” the Fed researchers said wrote in a blog post.
“The real test, of course, will be whether these borrowers will continue to be able to make payments on their credit cards.”
Now, studies show fewer Americans are paying off their credit cards in full.
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Almost half, or 46%, of credit cardholders have debt on at least one card month-to-month, up from 39% last year, according to a new report from Bankrate.com.
“People are holding out for now, but some of the cracks are starting to show,” said Ted Rossman, senior industry analyst at Bankrate.
Not only can carrying a balance lower your credit score, but sky-high APRs make credit cards one of the most expensive ways to borrow money.
The median credit card rate is now averaging 19.6% — at an all-time high — after rising at its steepest annual pace on record, in step with Federal Reserve rate hikes to fight inflation.
Coupled with the Fed’s pledge to keep raising its benchmark until more progress is made, credit card rates will top 20% by the end of the year, Rossman predicts.
Those with revolving debt tend to have even higher interest rates, he said. However, 43% of those who have a balance don’t even know the interest rate they’re being charged, Bankrate also found.
The math is “amazing”
At 19.6%, if you make minimum payments on the average credit card balance — which Transunion says is $5,474 — it would take you nearly 17 years to pay off the debt and cost you more than $7,528 in interest, calculated bank rate.
“The math is pretty mind boggling,” Rossman said.
The first thing you should do is acknowledge what you owe and the rate of interest, he advised. Then start paying off the debt with a 0% balance transfer card.
A 0% balance transfer card is “the best weapon you can have in your arsenal against credit card debt,” said Matt Schulz, LendingTree’s chief credit analyst.
“If you don’t take steps to reduce that debt, it will only get more expensive,” Schulz said.
Cards offering up to 21 months with no interest on transferred funds “are still common,” he added.
According to Schulz, getting the most out of a balance transfer comes down to making those payments on time and aggressively paying off the balance during the introductory period.
If you do not pay the balance, a higher APR will be applied to the remaining balance, generally averaging around 23%, which is in line with new loan interest rates.
https://www.cnbc.com/2023/01/10/americans-lean-heavily-on-credit-cards-amid-inflation.html Americans rely heavily on credit cards amid inflation