American credit card totals coming soon
Credit card balances peaked at $927 billion in the fourth quarter of 2019, according to the New York Fed's Quarterly Report on Household Debt and Credit. He declined in four of the next five quarters as the COVID-19 pandemic began, and bottomed out at $770 billion in Q1 2021 (down 16.9% peak-to-trough).
Since then, his credit card balance has increased for three consecutive quarters, reaching $856 billion in the fourth quarter of 2021 (a record set in the fourth quarter of 2019). 7.7% below). When the New York Federal Reserve releases his first quarter 2022 data on May 10, it will likely be near an all-time high.
Credit card spending surged in Q1
In its April 22 earnings call, American Express said its customers spent more in March 2022 than any other month. Cardmember spending increased 35% in Q1 2022 compared to the same period in 2021.
Capital One reported a 26% year-over-year increase in purchase volume. Chase pointed to a 21% year-over-year increase in the first quarter earnings call (credit and debit cards combined), adding that credit growth was stronger than debit.
The Federal Reserve Monthly Consumer Credit (G.19) Report also shows a sharp increase in credit card balances. The latest release (March 2022) showed a staggering 35.3% annualized increase in revolving debt (primarily credit card debt). This was the largest increase since April 1998. Total revolving debt is just 0.2 percentage points below the all-time high established in February 2020.
Of course, much of this is driven by strong consumer spending, but credit and debit cards are underpinned by the growth of e-commerce and the ongoing shift away from cash. It's great if you can get paid to avoid , but it can be very expensive if you pay interest every month.
Recently, credit cards also seem to benefit from behavioral quirks. Many Americans prefer to use debit cards for everyday items, but use credit cards for larger discretionary purchases such as travel. As the COVID-19 pandemic appears to subside, some spending is shifting away from goods and toward services such as flights and hotel stays, with credit cards tending to be preferred over debit cards. . We must also acknowledge the highest rate of inflation in 40 years as a driver of increased spending and credit card balance growth.
What's next for outstanding debt?
Add all of this up and you're likely to hit a new record for total credit card balances by the middle of the year. Beating the previous record would require an 8.3% quarterly increase from the fourth-quarter balance reported by the New York Fed. It may be a little steeper in the May 10 report, but it could be close. Credit card balances grew 6.5% from Q3 to Q4 2021. It's possible, as the latest numbers reported by Amex, Capital One, Chase and the G.19 report show that spending growth accelerated in the first quarter.
By contrast, it took more than five years for credit card balances to find a bottom during and after the financial crisis (from peaking at $866 billion in Q4 2008 to 2014). to the nadir of $659 billion in the first quarter). After that, it took another five years (until Q4 2018) to surpass the previous record. It was slow motion compared to our current situation.
Interest rates are rising
Unfortunately, for those with credit card debt, this debt is even more expensive. To combat inflation, the Federal Reserve raised the federal funds rate by 25 basis points in March and another 50 points earlier this week. It's just the beginning. According to the CME FedWatch Tool, investors are pricing in additional price increases that are most likely to add up to about 200 basis points in total by the end of the year. These higher rates typically trickle down to credit cardholders within a month or two and relate to existing balances and new purchases.
Later this year, the cumulative effect should push the average credit card interest rate (currently 16.41%, according to Bankrate) well above 18%. The record to date is 17.87% (set in April 2019).
At the time, the prime rate (generally 3 percentage points higher than the federal funds rate) was 5.5%, so the average margin was 12.37% (17.87 minus 5.5). The prime rate has risen from 3.5% to 4%, but it takes a little longer to get through the system, so a more accurate comparison is that the recent average margin was 12.91 percentage points (16.41 minus 16.41%). 3.5). If the prime rate ends the year at 6% and the average margin remains roughly the same, the average credit card rate may even knock on the door at 19% when the dust settles.
According to Experian, the average credit card balance is $5,525. Paying the 16.41% minimum payment would take him 195 months to pay in full, and in total he would pay $6,276 in interest. At 18.91%, it would take another 6 months and an additional $1,040 interest payment.
What You Should Do
My number one piece of advice for anyone in debt is to sign up for a 0% balance transfer card. These offers last her 21 months and save a lot of interest. Earlier, I mentioned the ugly minimum payment calculation. But on a $5,525 credit card balance he maintained 16.4% over 21 months is not very good. This would accrue a total of $868 in interest and require approximately $304 monthly payments.
By contrast, using a transfer card with her 0% balance allows him to make 21 payments of about $275. $5,525 without interest (normal balance transfer fees are 3-5%, which equates to $166-276 on his $5,525 balance). Still, as long as you can pay off your debt in the allotted time, it's worth it. Here's my favorite balance transfer card:
- Wells Fargo Reflect® Card: 0% interest on eligible balance transfers and new purchases for up to 21 months from account opening applies (only if all payments are made during the Introductory and Extension Periods). Beyond that, the variable APR goes from 17.24% to 29.24%. A 3% (minimum $5) balance transfer fee is discounted within the first 120 days. After that it increases to 5%.
- Citi® Diamond Preferred® Card: 0% annual introductory interest rate for 21 months from date of first transfer, 0% annual interest rate for 12 months from date of account opening. The variable APR then goes from 16.74% to 27.49% based on creditworthiness. Balance transfers must be completed within 4 months of account opening.
- Citi Simplicity® Card: 0% first-year APR for 21 months from date of first transfer, 0% first-year APR for 12 months from date of account opening. The variable APR then goes from 17.74% to 28.49% based on creditworthiness. Balance transfers must be completed within 4 months of account opening.
Record-high credit card balances and interest rates are troubling statistics, but Glass is kind of half-hearted. Both credit card delinquencies and household debt servicing as a percentage of disposable income are approaching record lows. Additionally, the percentage of credit card holders who pay their bills in full is nearing a record high.
Charlie Wise, senior vice president and head of global research, said, “While a prolonged inflationary environment will hurt many consumers, severe delinquency rates are the worst-case scenario. “Even in an inflation scenario, it will not exceed pre-pandemic levels.” Consulting at TransUnion. “Furthermore, once inflation subsides, the consumer credit market will likely see more aggressive credit action.”
Still, on the horizon has warning signs. All the news is local, and the burden is growing for about half of credit card holders with high monthly balances. Rising costs and rising interest rates can shift credit card balances toward competition. This could create a vicious cycle of consumers delinquent payments and curtailing discretionary spending, both of which can be problematic for a consumer-driven economy.
Have a question about your credit card? Email us at [email protected] I will be happy to help you.