All those interest payments add up.
Americans paid banks some $104 billion in credit-card interest and fees in the last year, up 11 percent on the year and 35 percent over the last five years, according to the personal-finance website MagnifyMoney, which analyzed data from the Federal Deposit Insurance Corporation (FDIC) through March 2018.
The bad news: That number will likely only rise this year. The Federal Reserve has forecast four interest rate hikes (one every three months) in 2018. The Fed has increased interest rates twice this year to between 1.75 percent and 2 percent and has penciled in two more quarter-point moves.
When the Fed raises rates, which it did in June, credit-card debt gets more expensive because banks often pass on those higher rates to customers. Consumers with credit-card debt will likely pay an additional $2.2 billion this year in interest payments because of the last rate hike, the credit-card website CompareCards found.
If the Fed raises rates a total of four times this year, it will create a total of $110 billion for Americans to pay in credit-card interest and fees, MagnifyMoney found.
Collectively, that’s a huge amount, said Nick Clements, co-founder of MagnifyMoney. But people making payments on their credit cards are less likely to notice than those who make mortgage payments. “Most people will only see their minimum due increase by a couple of dollars,” he said. “It’s not dramatic.”
Additional interest-rate hikes can hurt those carrying large amounts of debt. Americans carry a collective $687 billion in credit-card debt that is not paid in full each month, Clements said. That breaks down to an average balance of $6,348 for people with credit cards, according to the credit agency Experian.
One bright spot: When the Fed raises rates, some banks offer higher rates on savings products, including savings accounts and CDs, Greg McBride, chief financial analyst at the personal-finance website Bankrate previously told MarketWatch.
Some consumers are taking that seriously. Americans paid back $40.3 billion in credit-card debt during the first quarter of 2018, an analysis of data by personal-finance website WalletHub concluded.
But they have a lot left to pay off. In 2017, Americans hit a record high of $1.02 trillion in outstanding revolving debt, which is often categorized as credit-card debt. In April 2018, they still had more $1.03 trillion to pay off, Federal Reserve said earlier this month.
The accumulation of large amounts of debt before the Great Recession and subsequent financial crash hasn’t taught consumers a lasting lesson, Clements said. Banks have loosened up their credit criteria, he added. “People are borrowing again and they’re borrowing on credit cards.”
