Americans are opening credit cards at record pace as rates soar

  • Americans are opening credit card accounts at a record pace, but expect a rude awakening.
  • The Fed’s fight against inflation is expected to drive credit card rates to record highs.
  • Higher rates could leave buyers paying thousands of dollars in interest.

This is a bad time to accumulate a credit card balance. That’s not stopping Americans from opening accounts at a breakneck pace — and all of this activity threatens to erase the financial progress many households have made during the pandemic.

Americans’ finances have generally held up well throughout the coronavirus


recession

. Household balance sheets recovered quickly at the onset of the crisis thanks to generous government stimulus and extraordinarily rapid job creation. By comparison, it took about a decade for households to stage the same rebound after the financial crisis.

This rapid recovery could soon cause consumers to overwork themselves. Americans opened a record 11.5 million credit card accounts in the first two months of 2022, according to data from a credit reporting firm Equifax. Credit limits on these new cards total $55.5 billion, up nearly 60% from the same period last year. Retail sales data has already shown Americans spend more than ever through April, and the Equifax report suggests the spending spree has room to work.

The timing, however, couldn’t be worse. The


Federal Reserve

is squarely in inflation-fighting mode, with policymakers expecting support for double rate hikes in June and July. These increases increase borrowing costs across the economy, including through higher credit card rates.

The average card rate is 16.41%, according to The bank rate, but the Fed’s battle with inflation could take it to historic highs. The Fed’s rate hike cycle could push that average to “well above” 18%, Ted Rossman, senior industry analyst at Bankrate, said in a note. This is above the April 2019 record of 17.87%.

On a consumer level, this represents a much higher bar to cross for Americans who pay high sales. The average credit card balance is $5,525, and it would take 195 months to pay it off by making the minimum payment with a rate of 16.41%, Rossman said. It would also cost around $6,276 in interest. At a rate of 18.91%, it would take that consumer six more months and an additional $1,040 in interest payments to pay off the balance, the analyst added.

Rising card rates wouldn’t be much of a concern if consumer debt was low, but the past few months have seen balances climb rapidly. According Federal Reserve Data. Americans aren’t just spending big, they’re racking up much bigger card balances.

Higher rates therefore present a new threat to Americans already hammered by inflation. Prices continue to rise at a rate not seen since the 1980s as supply chain problems and Russia’s invasion of Ukraine increase inflationary pressures around the world. The problem of rising prices has been enough to drive consumer sentiment to the bleakest levels in a decade. With rates on the rise, Americans’ spending sprees can quickly become much harder to repay.

“With credit card debt, they can just keep pushing it, so you get that higher rate on bigger and bigger amounts. And it’s very hard to tell, in the short term, if an extension of credit card debt is because people are borrowing more or paying back less,” Susan Sterne, president and chief economist at Economic Analysis Associates, told Insider. is it scary or not?'”

Granted, revolving credit is still below the pre-pandemic peak of around $1.09 trillion. Interest rates are still at historic lows, which means Americans won’t feel the slump for at least a few months. And although paying off credit card balances will soon become more difficult, consumer finances are generally in very good shape. Pent-up savings and stimulus measures from the start of the pandemic leave most households in a good position to cover their card payments.

Still, the relentless nature of US demand is raising concerns about upcoming rate hikes. Even though consumers are feeling really scared about the state of the economy, they are still spending at an extraordinary rate. At the same time, the Fed is raising rates at the fastest pace in two decades. If spending doesn’t slow, rising credit balances could lift Americans out of the bumper economic recovery and plunge them into new debt.