More credit card debt + higher rates = a bad combination

Paying down your credit card debt should always be among your top financial priorities, and that’s especially true right now. Americans’ credit card balances are growing rapidly, and interest rates are also likely to climb in 2022.

In November 2021, revolving debt surged by $19.8 billion, according to the Federal Reserve. On an annualized basis, that’s a whopping 23.4%. (Revolving debt mostly comprises credit cards, along with some smaller categories such as home equity lines of credit and personal lines of credit.)

Since April 2021, revolving debt has grown by a total of $72 billion (7.5%). It’s now within striking distance ($60 billion or 5.5%) of the all-time high set in February 2020, just before COVID-19 officially became a pandemic.

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New highs on the horizon

If revolving debt continues to increase at the rate it has since last April, it will eclipse the previous record of $1.098 trillion in May 2022. It’s a good bet that we’ll see a new high by mid-year, particularly since:

• Government support has waned (for instance, direct stimulus payments, extra unemployment benefits and expanded monthly child tax credit disbursements are all in the rear-view mirror and federal student loan forbearance will end soon).
• Inflation is running at its hottest pace in 40 years.
• The Federal Reserve is projected to raise interest rates several times this year (the median projection among Federal Open Market Committee participants is a cumulative 75-basis-point increase by year’s end).

All of this is going to make it harder for Americans to pay off their credit card debt. Collectively, we have made a lot of progress during the pandemic. After rising for eight straight years, the average credit card balance fell from $6,494 in 2019 to $5,897 in 2020 to $5,525 in 2021, Experian reports. Delinquencies and defaults have plummeted to rock-bottom levels, too.

Were those improvements a mirage?

The typical family of four received $11,400 in direct stimulus payments across 2020 and 2021 and many people spent less for a while due to virus fears and business closures. That freed up a lot more money for debt payoff.

It certainly hasn’t been an easy couple of years for most people, but at least in terms of their credit card balances, the trend has been upbeat. The latest data from the American Bankers Association show a record low percentage of credit cardholders carrying debt from month to month. However, I’m worried about where we’re headed.

Using the past as a guide

Revolving debt also fell considerably during and after the financial crisis. Beginning in January 2009, it decreased for an incredible 25 consecutive months – a total decline of 17.2%. Revolving debt was below $1 trillion from February 2009 until October 2017.

The drop was much faster this time around, and there’s ample evidence that the climb back up will be much more rapid, too.

What you can do about it

My top tip for knocking out your credit card debt quickly at the lowest possible cost is to sign up for a 0% balance transfer card. These offers last as long as 21 months and can save you hundreds, maybe even thousands, of dollars (depending on how much you owe).

Signing up for a low-rate personal loan is another popular form of do-it-yourself debt consolidation. If you want more guidance, or if you have a lower credit score that prevents you from getting an attractive personal loan rate, a nonprofit credit counseling agency, such as Money Management International, can be tremendously helpful.

Also consider taking on a side hustle, selling stuff you don’t need or finding ways to lower your expenses. A dollar saved is a dollar earned, especially when we’re talking about an average credit card rate that’s north of 16% and almost surely headed higher.

Have a question about credit cards? E-mail me at ted.rossman@creditcards.com and I’d be happy to help.