Picture of Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

Credit card balances surge – and likely to get worse

American consumers supercharged their debt in the third quarter as inflation continued to outpace wage hikes and covid-era savings dried up. According to the New York Federal Reserve, balances on retail credit cards shot up by $38 billion from the previous quarter and increased by 15% over the same time last year, the biggest increase in over 20 years. This jump comes on the heels of a massive pay-down in debt during the pandemic and its immediate aftermath.

The third quarter spike in consumer debt may prove to be a harbinger of greater challenges ahead if cash-strapped households turn to credit cards for holiday shopping and paying routine expenses like utilities and groceries. Outside of payday loans, credit cards are the costliest credit available and digging out from a pile of high-interest debt can seem more difficult than escaping the gravitational pull of a black hole.

Nearly 7 in every 8 American adults have at least one credit card, and modern life can be difficult to navigate without one. The first recognizable revolving charge account was introduced in 1958 by a California bank called Bank of America. This charge card, originally called the BankAmericard, was eventually licensed to other banks and grew into what we know today as the Visa network. A competitor called Master Charge was created in 1966 by a consortium of banks and was renamed MasterCard in 1979. Both Visa and MasterCard are issued and serviced by individual commercial banks. American Express first debuted its classic green card in 1958, and Discover was created in 1985 by Sears Roebuck & Co. AMEX and Discover do not partner with banks but issue and service their cards directly.

Proper use of revolving credit cards including prompt repayment of the full balance adds a significant level of convenience to our daily routines. Additionally, a variety of perks including travel benefits, experiences, and cash back are available to cardholders. However, carrying a balance over more than a single billing cycle accrues interest, often at usurious rates that can entrap borrowers in a debt spiral from which it can be difficult to emerge. The recent sharp rise in card balances suggests that many households are having more difficulty making ends meet without incurring additional debt, a situation that may worsen as incomes continue to lag price increases and unemployment ticks higher.

Credit cards interest rates are based upon the so-called prime lending rate, the rate banks charge their best customers, currently 7%. Then depending on factors like FICO score and income, additional layers of interest are stacked on top to determine the consumer’s effective rate. And with the recent series of Federal Reserve rate hikes, credit card interest rates have risen significantly over the past year. According to, the average annual percentage rate in November reached 19.3% and can range as high as 25% depending on creditworthiness. Card issuers justify the exorbitant rates by noting the relatively higher rate of default compared with secured credit like mortgages or car loans and observing that the interest rate is zero for borrowers who pay their statements in full by the monthly due date. For those who are unable to pay in full, the picture is not pretty. To appreciate just how hard it can be to extricate oneself from such onerous interest charges, consider the following example.

Suppose you have amassed a $5,000 balance on your retail charge account and are unable to make more than the minimum payment each month as computed by the credit card company. In a typical example, the minimum payment equals the accrued interest for the previous month and any late fees, plus 1% of the outstanding balance. In our example at the average rate of 19.3% and paying only the minimum, it would take nearly 15 years to retire the debt assuming no additional charges. Furthermore, the total interest paid would amount to over $6,400, far in excess of the original balance.

According to TransUnion, nearly half of all households carry balances over from month to month averaging $5,270. And of those households, 60% have maintained an outstanding balance for over one year, and over 14 million households have outstanding credit card debt in excess of $10,000.

With interest rates rising and a slowing economy, now is the worst possible time to be adding to retail credit card balances. Of course, the best action would be to pay off the debt, but this is not an option for many. For families with existing high-interest debt, consider seeking a personal loan with a lower rate to pay down the credit card accounts. Another option is to apply for a zero-interest rate balance transfer card. Several options are available to borrowers with good credit to roll over their existing account to a card with no interest charge for a specific period like 12 months, providing a little breathing room to grind down the balance.

Credit cards are very nearly a necessity of modern life but can turn to quicksand if balances amount and are carried from month to month. This is a particular risk during the holiday shopping season. Nothing says “humbug” like a bill for last year’s ugly sweater. Plus interest.

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