What’s Behind $1 Trillion in Credit-Card Balances? | Mint
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Business News/ News / What’s Behind $1 Trillion in Credit-Card Balances?
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What’s Behind $1 Trillion in Credit-Card Balances?

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It’s hard to blame the Federal Reserve as the reason Americans’ card bill surpassed $1 trillion this month

It is hard to blame credit-card rates as the reason for Americans’ surging credit-card balances, up over $1 trillion for the first time this month.Premium
It is hard to blame credit-card rates as the reason for Americans’ surging credit-card balances, up over $1 trillion for the first time this month.

If your credit-card bill is growing every month, don’t blame rising interest rates. Look in the mirror.

Credit-card interest rates have hit record highs, with the current average rate at 22.16%, up from 16.65% a year ago. That increase adds about $25 a month in interest on an average credit-card balance of $5,733, according to TransUnion data.

Given that relatively modest increase, it is hard to blame credit-card rates as the reason for Americans’ surging credit-card balances, up over $1 trillion for the first time this month. Instead, the trillion-dollar number is fueled by still-elevated inflation, consumers’ continued spending and a smaller share of borrowers paying off their statements in full, say analysts and financial advisers.

“Spending, and how much of the bill you pay will very much overwhelm the interest," said Christopher Fred, head of credit cards at TD Bank.

High interest rates are supposed to slow spending by rewarding savers and making it more expensive to borrow money—including on a credit card. But so far, many credit-card users haven’t felt burdened by higher rates despite the Federal Reserve recently raising its benchmark rate to a 22-year high.

Part of the reason borrowers have done well is that credit-card companies fighting for market share have continued to shower consumers with 0%-interest promotional offers. Those offers have helped lenders open a record $89 billion worth of new credit lines so far this year, according to data from the Federal Reserve Bank of Philadelphia.

While higher interest rates make existing card debt more expensive to manage, federal regulations require that card issuers set minimum monthly payments that cover all of the finance charges. That means higher interest rates can’t grow balances on their own.

Behind the Balances

One main reason balances are up is Americans are spending more on nonessentials such as travel and clothing, even as they curb spending in other categories, according to a survey by Morning Consult. Though the majority of people say they are still able to save, a growing share of adults are reporting rising debt levels, the survey showed.

“It doesn’t look sustainable to me," Kayla Bruun, an analyst at the economic research firm, said of people’s spending habits.

If higher minimum payments are straining your budget, you should probably refinance your debt with a personal loan or balance-transfer offer, said David Silberman, a senior fellow for the Center for Responsible Lending. There are several ways to refinance, including transferring multiple balances onto one lower interest-rate card.

In addition to 0%-interest balance-transfer offers, personal loans from banks and other financial institutions have become a more popular way to consolidate credit-card debt. The current average rate for a 24-month loan is 11.48%, about half the rate for credit cards, according to Federal Reserve data.

Credit-card borrowers who decide to refinance with a personal loan tend to have higher credit scores than those who don’t, an August TransUnion study found.

Still, refinancing alone doesn’t necessarily help get out of debt. Borrowers who use personal loans to pay off credit-card debt tend to build most of that balance back up within 18 months, according to the study.

Consumers should be careful not to take on more credit than they need, even if tempted by low promotional rates, Silberman said. Discipline to reduce debt is much more important than any debt instrument.

“We humans tend to overestimate our capacity for self-restraint," he said.

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