At first, she hardly noticed.
Susan Scallan had bought furniture when she moved into housing for low-income seniors in Decatur three years ago. And then, while dealing with a health crisis, she used “retail therapy” to comfort herself with clothes and shoes.
Although she’s receiving some Social Security and working a $14-an-hour receptionist’s job, she doesn’t have enough for rent, food and also to pay off her credit card bills, too, so she carried some debt over from month to month.
“I didn’t even think about credit card rates going up, because everybody was only talking about the mortgage rates. And then, all of a sudden, my balances were so high, it just snuck up on me. Right now, I’m not charging anything.” She was maxed out.
“I’m at fault, too,” she said. “It’s not just the interest rate. I’ve made some foolish choices.”
Perhaps. But she is surely not alone.
For people who pay their debts in full each month and never incur interest, the credit card rate doesn’t much matter. But nearly half of all cardholders are carrying some debt from one month to the next, up from 39% a year ago, said Ted Rossman, senior industry analyst for Bankrate.
The Federal Reserve has been raising short-term borrowing rates for big banks, aiming to tame inflation by discouraging lending to slow the economy. In February 2010, the Fed’s benchmark rate was 0.13% and the average credit card rate was 13.63%.
At the start of the pandemic the Fed dropped its rate back toward zero, but since late 2021, it has hiked the rate to 4.58%. That change, like the first falling domino, sent other rates skyward as lenders raised their own rates to cover costs.
At first, the changes put the housing market in the spotlight, as wannabe buyers backed away from higher mortgage rates and sales plummeted. But credit card companies were also lifting the rates paid by tens of millions of Americans who carried at least some debt from month to month.
“When the Fed moves, the higher credit card rates can hit almost overnight,” Rossman said. ”Credit cards tend to be profit centers. In the past year, they have been especially profitable.”
The average credit card rate is now between 19 and 20%, up from about 15% at the start of the pandemic, according to Beverly Harzog, Alpharetta-based credit card expert and consumer finance analyst for U.S. News & World Report.
The credit card companies charge annualized interest for everyday cardholders carry debt, and each day’s calculation includes the interest charged for the preceding day.
It adds up.
A $1,000 debt at 20% annualized interest would mean a charge of $16.57 after a month. If the consumer didn’t pay anything, the second month would add $16.84 to that charge and the third would add $17.12 to that.
After six months, interest would have added $105.53 to the original bill.
The danger is most acute for people who are using credit cards to cover daily expenses, she said. “About two-thirds of Americans live paycheck to paycheck. They have been using credit cards to make ends meet. When people use credit cards a lot, it’s usually because they are having trouble.”
And especially for people without savings to draw on, it can be hard enough to keep current and even harder to do so while paying off a past bill, she said. “It is difficult to get out of credit card debt. That is just a fact.”
And the number of people falling behind on their credit card bills has been rising: About 2.25% of credit cards were delinquent at year’s end, up from 1.55% a year earlier, according to the Federal Reserve.
Yet that is historically low. Most workers have jobs and many have been given raises. In contrast, when foreclosures were rampant and unemployment was in double-digits in 2009, the delinquency rate peaked at 6.77%.
Still, the trend is in the wrong direction, Harzog said.
Higher rates make an economic stall-out more likely, while also pushing more people into delinquency. Smart consumers should try harder to avoid more problems down the road, she said.
“We are entering a risky period,” Harzog said. “While the Federal Funds Rate keeps going up, we are in a situation where people need to look at their debt and look for options to pay that down.”
Moreover, the Fed is clearly not finished fighting with inflation, which means many household budgets will be increasingly pinched even as interest rates keep rising.
The average household with credit card debt owes $7,919, and will pay more than $1,000 in interest this year — and that’s assuming interest rates don’t go higher, said Sara Rathner, credit cards expert at NerdWallet, a personal finance website and app that provides consumers with financial information.
“In the last three years, the median income is up 7% and costs are up 16%,” she said. “So not only are they taking on debt, they are taking on debt at a higher cost. That is concerning.”
For Susan Scallan, that concern has meant an end to any careless spending, a readiness to use the local food pantry and the hope that when she files her tax returns she’ll get enough money back to help pay off her cards.
She’s hopeful, but not confident.
“I haven’t defaulted on anything yet,” Scallan said. “I don’t want to file for bankruptcy, but I may not have a choice.”
Average credit card rate
November 2022: 19.07%
February 2020: 15.09%
February 2005: 12.21%
Interest fee on $1,000 after one month
20%: $16.57
19%: $15.73
15%: $12.40
12%: $9.91
10%: $8.25
Credit card delinquency rate
Historical high: 6.77% (2009, second quarter)
Historical low: 1.55% (2021, second quarter)
Fourth quarter, 2019: 2.62%
Fourth quarter, 2020: 2.13%
Fourth quarter, 2021: 1.57%
Fourth quarter, 2022: 2.25%
Source: NerdWallet, Bankrate, Beverly Harzog, Federal Reserve
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