U.S. consumer debt, and particularly credit card debt, is on the rise according to a federal report released this week and surging interest rates on carryover credit card balances are likely to drive that debt even higher.
On the verge of holiday shopping moving to front-of-mind for many consumers, it’s worth knowing that cards offered by some big U.S. retailers can come with rates well over the average for all other cards, and now, for the first time, even exceeding what was a once-respected barrier of 29.99%.
What’s behind the record-high credit card rates?
A Tuesday report from the New York Federal Reserve Bank found U.S. consumer credit card debt stood at $925 billion at the end of the third quarter of this year, jumping $121 billion from the second quarter and a figure that’s 15% higher than the same time last year. The amount of credit card debt being carried by U.S. consumers falls just shy of the all-time high of $927 billion set in 2019.
LendingTree chief credit analyst Matt Schulz wrote in a blog post after the new data was released that “thanks to rising interest rates, stubborn inflation and myriad other economic factors, it’s likely just a matter of time before credit card balances surpass the 2019 record.”
Shulz wrote that the average annual percentage rate for all current credit card accounts jumped to 16.27% in the third quarter of 2022, up from 15.13% in the second quarter. Meanwhile, APRs for cards accruing interest shot up to 18.43%, way up from 16.65% in the second quarter. According to the Fed, the average for all card accounts and for those accruing interest are both the highest they’ve been since tracking began in 1994.
Why are rates on some store-branded credit cards so high?
Shulz told CNN that 30% used to be an unspoken ceiling for interest rates on carryover balances, but at least a half-dozen major retail credit cards — including those for Kroger, Bloomingdale’s, Macy’s, Shell, Exxon Mobil and Wayfair — recently bumped up their maximum APRs to more than 30%.
“That ceiling is beginning to crack,” Shulz said.
Shulz warned consumers, who may be tempted to take advantage of sign-up discounts or low introductory rates on store-branded cards, to conduct careful research before applying for new credit.
“We know a lot of people will apply for them without fully understanding what they’re getting into, and that’s even more troubling this year than most,” Shulz told CNN. “Rates are changing so quickly that there’s a chance that the brochure they may have at the counter at your local store may not have the most up-to-date information.”
More U.S. shoppers are considering store credit cards this year
Results of a national Lending Tree survey released earlier this month found 35% of Americans say they’re at least somewhat likely to apply for a store credit card this holiday season. That’s up from 29% a year ago and the second-highest percentage in the five years Lending Tree has been tracking the data.
The survey also gathered data from respondents who had previously obtained store-branded credit cards, but went on to regret the decision.
Lending Tree’s survey found nearly 4 in 10 (37%) people who have a store card or have had one previously say they regretted getting at least one of them. That includes 14% who say they’ve regretted several store cards.
Lending Tree also issued some guidance for those who may be considering adding a store-branded card this year as the holiday shopping season gets under way:
“Used wisely, a store credit card can be a really useful tool, despite its less-than-stellar reputation. However, that doesn’t mean that reputation wasn’t deserved. The truth is that if you carry a balance regularly, a store credit card probably isn’t for you — the interest rates are just too high. You’d likely be better off with a general-purpose credit card that would have lower rates, possibly offer more lucrative rewards and be usable anywhere credit cards are accepted. If you choose to get a store credit card, ensure you understand some key details about the card before applying, especially the interest rate. What you don’t know can cost you, so tread lightly.”