Higher prices and interest rates are causing people in the U.S. to take on more debt, especially credit card debt. Credit card debt increased by $46 billion in the second quarter of 2022, and grew 13% since the same time last year—the biggest annual jump in credit card balances in over 20 years, according to the Federal Reserve Bank of New York’s most recent quarterly report on household debt and credit. People in the U.S. opened 233 million new credit card accounts in the second quarter of this year, which is the most since 2008. Inflation is one reason for the high credit balances, according to New York Fed economists, with the increase in credit card debt partly reflecting how inflation has made things such as groceries and gas more expensive. Inflation in June reached a high not seen since 1981, and while it showed signs of cooling in July, it’s still too early to tell whether prices will continue to drop in the coming months. The “core” inflation rate, which excludes more volatile food and gas prices, was up 0.3% in July from June. Credit card debt wasn’t the only type of debt to increase in the second quarter, though. Mortgage balances rose $207 billion, and auto loan balances were up $33 billion. The total household debt in the U.S. increased by $312 billion, pushing the total to $16.15 trillion—$2 trillion more than at the end of 2019, just before the pandemic. Having debt is expensive right now as the Federal Reserve has raised interest rates a few times this year in its fight against inflation. Higher interest rates make borrowing money more expensive for credit cards—the average credit card interest rate hit 21.33% in July, according to data collected by The Balance, the highest rate seen in over two years. Car loans, mortgages, and more are also affected by interest rate hikes and inflation. The Federal Reserve released its July meeting minutes on Wednesday, showing plans to continue with a tight monetary policy and raise interest rates in an effort to bring annual inflation closer to the central bank’s target rate of 2%. While this should help cool inflation, more interest rate hikes mean that borrowing money will get pricier. However, the minutes also stated that the Fed will likely slow down the pace of these interest rate hikes as it evaluates the effects that the rate hikes have on inflation and the economy. If you’re one of the many people in the U.S. that have credit card debt, it’s a good time to start paying it off so you don’t end up getting charged hundreds of dollars in interest. Carrying a balance on your credit card each month and falling behind on payments will not only result in penalty and interest charges that can make you fall further into debt, but it can affect your ability to borrow more money in the future. If you can’t afford to pay off your credit card balance, consider a balance transfer to a card with a lower interest rate, or contact the credit card company to see if it can offer help.
