In recent years, Americans have become increasingly aware of their mortgage rates, especially after the Federal Reserve decided to keep rates unchanged this week, leaving the 30-year fixed rate at 7.19%. However, when it comes to their credit cards, many are unaware of the interest rates they are paying.
According to data from the New York Fed, credit cardholders collectively carry over $1 trillion in credit card debt across approximately 578 million accounts. This surpasses the percentage of U.S. households carrying mortgage or car loan balances. A 2023 NerdWallet analysis revealed that about 47% of U.S. households carry a credit card balance.
Elizabeth Renter, a data analyst at NerdWallet, explains that the Federal Reserve's influence on higher interest rates has impacted credit card interest rates as well. Average interest rates on credit card accounts have risen from just over 16% in February 2022 to just over 22% as of May 2023. Renter warns that this increase could cost consumers hundreds or even thousands of dollars if they carry a balance from month to month.
While a jump from 16% to 22% may not seem significant, it can make a substantial difference depending on the balance and the duration of repayment. For instance, paying off a $10,000 credit card debt over three years with a higher interest rate means making larger payments and paying more interest over the period.
Renter attributes part of the increase in credit card debt to inflation. Higher prices push some households to rely on credit cards to cope with financial pressures. However, she emphasizes that carrying higher debt for longer periods becomes more expensive, particularly with higher interest rates.
To identify their credit card interest rates, individuals can refer to their monthly statements or view them online. If they pay off their credit card balance each month, they can typically avoid interest charges altogether.
It's important to note that some people turn to credit cards as a source of emergency funds when their savings are depleted or unexpected expenses arise. While having an emergency fund is ideal, Renter suggests seeking help from a certified nonprofit credit counselor if individuals find themselves overwhelmed by debt during economic hardships.