Americans keep running up credit card debt even as interest rates climb

Americans continue to pile onto their credit card debt at a robust pace, a worrying trend as the Federal Reserve plans more interest rate hikes this year.

Revolving consumer credit rose at an annual rate of 11.6% in July, according to a report last week from the Federal Reserve, to almost $1.137 trillion in outstanding debt, another record high. While the pace is down from a 16.8% annual rate jump in June, that growth is still significant.

And with economists forecasting more central bank rate hikes this year, that means anything that's not paid off is about to get more expensive because rates on credit cards typically march in lockstep with the Fed rate increases.

Now’s the time to think about reducing those balances.

Buying on credit has become the default move for many Americans

This year many consumers have become reliant on borrowing funds on their credit cards to navigate higher prices for everyday expenses from gasoline to groceries triggered by the run-up in inflation, or bumped up their spending on things that make them feel good like leisure travel that they had put on hold during the pandemic.

The numbers for consumer spending released by the Bureau of Economic Analysis on August 25 showed that spending in July climbed 0.1%.

To set the scene, consider this: Credit card balances increased $46 billion in the second quarter, according to an August report by the Federal Reserve Bank of New York, a 5.5% increase from the first quarter. While balances remain below their pre-pandemic levels, the 13% year-over-year increase marked the largest annual gain in more than 20 years.

Moreover, Americans opened an additional 233 million new credit card accounts during the second quarter. That’s the most since 2008.

And a whopping 2 in 5 Americans expected to pile on debt between now and the end of the year, according to a Lending Tree survey which polled over 1,000 U.S. consumers. The bulk of that will be racked up on credit cards (22%).

Credit card interest rates expected to continue to climb

Now the Fed is expected to hike the prime rate by another three-quarters of a point this month, especially after inflation data for August came in hotter than expected. That follows four increases this year alone.

Any rate increase by the Federal Reserve will be reflected in interest rates charged for all variable rate loans from auto loans to mortgages and home equity loans and lines of credit, but, importantly, to the Annual Percentage Rate (APR) or yearly interest rate consumers who carry a credit card month-to-month balance will pay in the coming months.

On credit cards, the rate will increase 30 to 45 days after the Fed hikes rates.

The average variable credit card interest rate is now 18.03%, up from 16.1% just in June, according to Bankrate.com.

That’s expensive especially if you’re one of the more than 3 in 5 (61%) Americans are already grappling with debt, with credit cards being the biggest culprit (70%), according to the Lending Tree survey released in July. The most common reason for those already carrying a debt load: Necessities (30%), emergencies (26%) and health or medical issues (25%).

What you can do

If you carry a balance on your credit cards, look for a low-rate credit card to tap. If you’re already swamped with a high-interest payment, apply for a balance-transfer card that typically comes with a one-time 3% to 5% fee on the balance you are moving, but 0% interest for up to 21 months.

Automate monthly payments from your checking account for recurring bills, even if it is just the minimum due, you’ll avoid late fees. But try to pay more than the minimum when you can to start chipping away at that debt faster before more Fed hikes come.

Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon

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