Credit Card Interest Annual Price Tag: $1 Billion
Americans are paying more than $100 billion in credit card interest annually.
That means the average American household using credit cards is throwing almost $2,000 a year in the garbage with interest payments.
And it’s only going to get worse.
The Federal Reserve is expected to continue raising interest rates through 2018, which means your monthly interest payments will go up even if you don’t put another dime on your credit card.
The news should be a red flag to consumers: It’s getting easier to fall into debt, and the only way to avoid it is through proper money management.
“People should try to develop a habit of only making credit card purchases that they are certain they can pay off at the end of the billing cycle,” said Terrance Odean, a Finance Professor at the University of California at Berkeley. “If one has credit card debt that one simply can’t pay off, be careful to make monthly payments on time.”
The $100 billion mark was reached in March of 2018. The number 100 is nice and round and often a milestone worth celebrating, like a 100th birthday or a football player gaining 100 yards.
In this case, hitting 100 is troublesome. Members of the $100 Billion Club spent that money on nothing – donated it! – since the only thing interest does is finance debt.
The actual number measured from March 2017 through March 2018 was almost $104 billion. It’s the first time annual interest payments have topped $100 billion, and experts say it’s not likely to ever dip below the triple-digit figure again.
“A change in the credit card fee structure or a dramatic drop in borrowing could drop total credit card fees and interest below $100 billion again,” Odean said. “But this currently seems unlikely.”
The $104 billon mark was almost $10 billion more than the previous year and $30 billion more than 2013. As bad as that was, at least the Fed was keeping interest rates at historic lows in an attempt to help the U.S. dig out of the Great Recession.
As the economy has recovered, the Fed has cautiously but steadily increased rates. They were up to 2% in June 2018. When all the rate increases are factored in, that means Americans will spend $9.8 billion more than would have in the zero-interest days.
That’s because most credit cards have variable rates that are tied to rates used by banks. Those banks take their cues from the interest rate the Fed places on overnight transactions between banks.
So when the Fed speaks, banks listen. And what it’s been hinting is that it will raise rates twice in the second half of 2018.
“The Fed previously dropped rates to historical lows in an effort to stimulate a lagging economy,” Odean said. “With the current strong economic growth, the Fed will probably follow through with its stated intention to raise rates.”
The interest rate on credit cards climbed to a record high average of 17.2% in July 2018. And the typical American carries a credit card balance of $6,375, according to Experian.
The expected increases could mean hundreds of dollars more in interest charges to the typical consumer.
So, what can you do about it? The obvious answer is to pay off your credit cards as soon as possible.
If only it were that easy.
It takes two main things to pay off credit card debt – planning and dedication. Among the planning options to consider are transferring your balance to 0%-interest cards, if you have a high enough credit score to qualify for one.
The danger is that those low introductory rates expire, often within a year. If you’re not careful, the higher rates are going to kick in and cost you more money than you initially saved.
And transferring balances just moves money around. It doesn’t put a dent in your actual debt or address the real problem of overspending.
Many consumers need help with that, and millions have found it with debt management programs. Nonprofit companies consolidate all your debts and work with lenders to lower interest rates. Many consumers do not realize they can consolidate credit cards with a nonprofit program, versus taking out a new loan.
You make one monthly payment that is lower than the combined total you were paying. Certified counselors help you come up with a budget and work with you to get out of debt.
That’s where the dedication comes in.
“Paying off credit card debt, while staying current on the other obligations such as car loans, should be a top financial priority,” Odean said.
If you do things right, it won’t matter what the Fed does. And you can celebrate by not being a member of the $100 Billion Club.
Cox, J. (2018, July 19). Trump lays into Federal Reserve, says he’s ‘not thrilled’ about interest rate hikes. Retrieved from: https://www.cnbc.com/2018/07/19/trump-lays-into-the-fed-says-hes-not-thrilled-about-interest-rate-.html
Robb, G. (2018, June 13). Fed lifts interest rates and aims for another pair of increase later this year. Retrieved from: https://www.marketwatch.com/story/fed-hikes-interest-rates-now-sees-4-moves-this-year-2018-06-13
Sullivan, B. (2018, January 11). State of Credit: 2017. Retrieved from: https://www.experian.com/blogs/ask-experian/consumer-credit-review/