Americans are going to pay $45 billion more in interest this year due to higher credit card interest rates
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- The Federal Reserve has raised interest rates repeatedly since 2022, and that makes credit card debt expensive.
- With debt balances at $986 billion, Americans will pay $45 billion more in interest than they would have.
- Black and Hispanic Americans are more likely to have credit card debt than white Americans.
Americans are depending on their credit cards to cope with rising prices, and as interest rates continue to climb, that debt is becoming more expensive. The Federal Reserve has been raising interest rates in an effort to curb inflation, and each time it does, the cost of carrying a balance on your credit card or having lingering credit card debt goes up as well.
The most recent rate hike came on March 22, with the Federal Reserve raising interest rates by 25 basis points. The goal is to get inflation down to 2%, but getting to that point could be bad news if you have significant credit card debt.
The average debt costs $4,061 in interest to pay off now
According to Experian, the average consumer's credit card debt worked out to $5,910 per person in 2022. At the beginning of 2022, the average credit card interest rate was 16.17%, according to the Board of Governors of the Federal Reserve. An average person paying off that debt at that interest rate and making payments of $150 per month would pay $2,573 in interest over 57 months.
Today's interest rates are 4.5% higher, though. Consumers could easily be repaying the same debt with an interest rate of 20.67% today. At this rate, that average consumer would fork over $4,061 in total interest as they paid off their debt over 67 months.
Americans will pay $45 billion more in interest this year
According to a recent report from the Federal Reserve Bank of New York, credit card balances increased $61 billion to $986 billion during the fourth quarter of 2022. This debt level surpasses the previous record debt level of $927 billion, which was set before the pandemic.
However, today's surging debt levels may be more problematic now than they were for consumers in 2022 and in pre-pandemic times. The Federal Reserve has dramatically increased the Federal Funds Rate since March 2022.
Using the average credit card APR of 16.17% from Q1 2022, Americans would have paid an average of $159 billion in interest over the course of one year on the total debt amount of $986 billion. With today's increased interest rates, however, today's consumers would pay $204 billion. That's a difference of $45 billion.
High interest disproportionately hurts Black and Hispanic Americans
Data from the Board of Governors of the Federal Reserve shows that Black and Hispanic adults were more likely to carry a balance on their credit cards at least once over the last 12 months at a rate of 38% for white Americans, 53% for Black Americans, and 49% for Hispanic Americans. Figures also show that Black and Hispanic Americans of all income levels were more likely to be denied credit they requested, which could leave them relying more on credit cards than on more affordable borrowing options.
White people were denied the level of credit requested 19% of the time at all income levels, compared to 41% for Black Americans and 36% for Hispanic Americans.
Ways to take control of your credit card debt
If you find yourself with large credit card debt, it's a good idea to pay it off quickly. But if you must carry debt, there are steps you can take.
Some card issuers offer 0% interest on balance transfers, but keep in mind that the 0% interest rate will only be for a certain period of time. If you go this route, make sure to pay off this balance within the allotted timeframe.
Alternatively, you could consider taking out a low-interest personal loan to pay off the high-interest debt, or you could work with your card issuer to reduce your interest rate.
The worst thing you can do right now is nothing. You may not notice the increase right away, but as time goes on, it will be like throwing money into a black hole — you'll see it and feel it in your wallet.