Vacation shoppers are spending more on credit cards despite high interest rates

Despite sky-high interest rates, Americans are charging record amounts on their credit cards as the holiday shopping season heats up, risking steep fees and credit score fallout that personal finance experts say , can be mitigated with a little planning.

Inflation, which stood at 7.7% in October, shows signs of slowing down but still hovering around historic highs. And while 37% of American households say their finances are worse now than they were last year, with 74% planning to spend at least that much this holiday season – around $1,455 per consumer – according to a poll from consultancy Deloitte. But respondents estimated that the same budget would only cover about nine gifts this year, compared to 16 last year.

Consumers “will find ways to meet the challenges they face,” says Rod Sides, global leader at Deloitte Insights. For example, households may reduce holiday decorations at home to leave more budget for gifts.

Some retailers said consumers are holiday shopping earlier than usual looking for offers. As the season progresses, spending for many Americans will already be piling up on credit card balances to a record $866 billion in the third quarter, 19% more than the same period last year, according to the TransUnion credit reporting agency. In some cases, cash-strapped households rely on credit to pay for more expensive necessities like winter utility bills.

Not paying off these card balances on time is more costly than it has been in decades. To combat high inflation, the Federal Reserve has raised interest rates this year at the fastest pace in 40 years. These hikes pushed credit card interest rates to an average of 19.04%according to Bankrate, surpassing the last record set in 1991 to reach the highest level recorded in data dating back to 1985.

Shoppers walk past a Bergdorf Goodman store on Fifth Avenue in New York City on December 27, 2021.Victor J. Blue/Bloomberg via Getty Images File

Experts say there are smart ways to shop with cards this holiday season while protecting both your bank balance and credit score.

Ted Rossman, senior analyst at Bankrate.com, suggests stacking discounts. If you have a rewards credit card, for example, look for opportunities to combine cardholder benefits with store discounts. The goal is to “find multiple ways to save on the same purchase,” he says. “Use the rewards credit card, assuming you’ll pay in full and avoid interest, but combine that with other things like a store coupon or coupon code.”

Rossman also suggests shopping through retail portals such as Rakuten, an e-commerce site where consumers can earn money on their purchases, or perks platforms operated by major banks. consumption, where customers can browse and activate offers and cashback offers.

As with every holiday season, many retailers are offering discounts to shoppers who sign up for their own branded store cards, which can reduce price tags at checkout. But analysts warn that high interest rates and potentially adverse conditions can trip up buyers, eroding hoped-for savings.

The average annual percentage rate of the new store card, or APR, is 26.60%, up from 24.27% a year ago, according to a recent report by LendingTree. It’s the highest interest rate since the credit card market began tracking it for store cards in 2018. Still, some 35% of Americans say they’re “somewhat likely” to ask. a retail card, up from 29% last year, according to LendingTree. .

“I think that’s probably telling you that people are looking for all the help they can get to stretch their holiday shopping budget,” says Matt Schulz, chief credit analyst at LendingTree.

Americans are used to carrying several credit cards. Cardholders wore an average of 3.8 cards by the end of 2020 compared to four in 2018, according to the US Consumer Financial Protection Bureau. (The decrease during this period may reflect reduced demand for new cards during the pandemic as well as an increase in card closures by issuers seeking to stem potential losses during the recession, among other factors.) Today, half of American adults have at least two credit cards and 13% have five or more, according to data released this month by the Federal Reserve Bank of New York and Equifax.

Using credit cards can help build credit. By paying off balances on time and in full, a borrower can build a strong credit history. But juggling many cards and high balances can be a sign of difficulty managing debt, which can hurt a borrower’s credit score.

And with fees and rates for new store cards even higher than current all-time highs for traditional credit cards, “many people’s financial margin for error is virtually zero,” says Schulz. In other words, if you think there’s even a chance you’ll miss a payment or carry over a balance, don’t sign on the dotted line.

Shoppers should look for ways to stay on top of their credit card spending this winter, says Malik Lee, certified financial planner and managing director of Atlanta-based Felton & Peel Wealth Management. This means, for example, making card payments well in advance of the due date if possible – given that spending is higher at this time of year – and minimizing the number of cards used to pay for holiday trips. .

“Don’t put money on the six cards you have, because that’s a good way to lose track of certain expenses, to lose track of balances,” says Lee.

At least some of Americans’ soaring credit card debt suggests many are trying to maintain similar lifestyles to before, Lee adds — before gas prices, grocery bills and rates of interest. This holiday season, he advises his clients to keep their financial goals in mind.

“You have to make a change,” Lee says. “You have to adapt”