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Credit card balances went up to $ 84 billion in the first three months of 2022, rising from $ 77 billion last year.
Dreamstime
Average interest rates on credit cards are heading toward an all-time high as the Federal Reserve continues to jack up its benchmark rate.
Annual percentage rates, or APR, have risen to 17.25%, on average, as of Wednesday. That is just slightly shy of the 17.87% record in April 2019 and up from 16.3% seen at the start of the year.
Consumers should expect rates to easily surpass that all-time high soon after Fed increases its federal funds target next week, Ted Rossman, a senior industry analyst at CreditCards.com told Barron’s.
What this means is that, at the current average interest rate, if someone is making minimum payments on a $ 5,000 balance, they would need 187 months to pay it off and they will owe $ 5,872 in interest, Rossman calculated. With average rates potentially climbing to 18% in the coming months, it would take an additional two months to pay the balance off.
For lower-income borrowers with not-so-great credit scores, things get worse. That is because they are likely paying more than the average rate.
In addition, lower-income borrowers have accrued more debt or have higher credit card balances than folks in the upper part of the distribution,
Citi
‘s
global chief economist Nathan Sheets said, pointing at high auto loan payments that many households in the upper strata can avoid.
The total amount of money that people owe on their credit cards increased to $ 84 billion in the first three months of 2022, rising from $ 77 billion in the same period last year, according to the most recent data from the Federal Reserve Bank of New York.
JPMorgan Chase
(JPM) clients are generally more well-off but the big bank still echoed some concerns about the lower-income segments in this month’s earnings call.
“If you look at cash buffers in the lower income segments and early delinquency roll rates in those segments, you can maybe see a little bit of an early warning signal,” Chief Financial Officer Jeremy Barnum said.
Delinquency rates have ticked up in the past quarter but only slightly, pointing to consumers’ ability to largely pay off their balances in full.
JP Morgan
said for the six months ended in June 30, 1.05% of its credit-card customers were 30 days delinquent, up from 1.01% a year ago.
Barnum thinks there is still a question of whether this could simply be normalization rather than an actual sign of deterioration.
The story repeats with
Wells Fargo
.
The bank said 1.54% of customers were over 30 days delinquent as opposed to 1.53% in the same period last year.
The banks don’t disclose the strata or credit scores of customers who went delinquent.
What’s key to keeping these rates in check is employment. If the unemployment rate doesn’t rise, then households will be well placed to manage these challenges, Sheets said.
But the number of Americans filing for first-time unemployment benefits has been gradually rising; it increased to 251,000 by July 16, jumping 7,000 from the previous week.
The job market is clearly not as strong as it was at the beginning of the year— signs that Fed is doing its job right.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com
.