Credit card debt increases as interest rates rise

On Tuesday, the Federal Reserve Bank of New York will release a report on US household debt for the first quarter of 2022. This includes credit card debt.

At the start of the pandemic, many Americans were spending less and receiving help in the form of government relief checks and expanded unemployment benefits. As a result, credit card balances have decreased.

But over the last three quarters, the sales have increased. Combine that with rising interest rates, and it could be a problem.

David Silberman of the Center for Responsible Lending has spent most of 2020 at home, working and hanging out with his grandkids.

“My credit card spending dropped. We weren’t traveling, we weren’t eating out,” he said. But since pandemic restrictions eased, his credit cards have been used a lot more.

“One of my sons lives in Israel, so we were able to see him and travel to Israel. My wife has just returned from a trip to Amsterdam. I was just at a conference in California,” he said.

Silberman said his personal spending reflected a broader pandemic trend. “In the beginning, a lot of us were saving money and paying off our debts,” he said. Now Americans are throwing expenses back into the mix and charging them to credit cards.

“It means on the one hand that they feel good enough to want to take on this debt, but on the other hand they are putting a burden on their balance sheet,” he said.

This burden amounts to a total of $860 billion, according to the New York Fed’s latest quarterly report.

“We’re basically giving back half of the gains we made in 2020 and early 21,” Silberman said.

Ted Rossman, principal analyst at Bankrate, said we are nearing a record amount of credit card debt nationwide.

“It’s because of inflation. People are spending more. But higher interest rates will add insult to injury,” he said.

But rising rates are unlikely to change the way we use our credit cards, according to Yale finance professor James Choi.

“People just don’t prioritize their spending on the low-interest credit card to begin with. And then when they pay off their credit cards, they don’t prioritize paying off their balance at the higher interest rate,” he said.

Unless Americans become more aggressive about paying off their balances, Choi said, their debt load will continue to grow.

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