“There’s really a tale of two cities in the credit card world – people who pay it off right away and get great benefits, and… others who can become trapped in an expensive debt cycle,” said Ted Rossman, a senior industry analyst for Bankrate in a recent interview with WWL’s Tommy Tucker.
In recent years financial pressures such as high inflation and high interest rates has made it more difficult for some cardholders to make those full payments. In fact, a report issued this week by the New York Federal Reserve Bank found that an increasing number of borrowers missed credit card payments altogether in the first quarter of the year.
“Credit card balances actually fell ever so slightly in the first quarter,” Rossman told Tucker. He added that “balances were down 1% from the fourth quarter to the first quarter – so not a big drop. We actually normally see an even bigger drop in the first quarter.”
That drop is usually fueled by the end of holiday spending, New Year’s resolutions and people using their tax refund money to pay down debt. Recent polling has found that most Americans feel their economic situation is poor, indicating they may not feel confident enough to prioritize spending on debt payments compared to other necessities.
Rossman said credit card delinquencies are at their highest point now since late 2011, which he admitted “sounds ominous,” though banks seem to believe this is a normalization following artificially low delinquencies reported during the COVID-19 pandemic. Lockdowns and stimulus payments helped contribute to those low numbers.
Delinquency rates do seem to be levelling off, Rossman said. However, Joelle Scally, Regional Economic Principal within the Household and Public Policy Research Division at the New York Fed said that the missing payments data revealed “worsening financial distress among some households.”
Last month, Audacy noted that a report from The Guardian found many Americans were relying on their credit cards for daily expenses. According to Rossman, that can be a risky position for consumers to be in.
“So many people these days are using credit cards for daily necessities, which, you know, I think is kind of a sad reality sometimes,” he said. “It is tough if you’re putting the groceries or gas on the credit card and making minimum payments forever and ever.”
He did say that credit cards are a useful way for people to “bridge the gap” as they work to strengthen their finances. If they can get to the point where they make full payments, credit cards can even work in their benefit. Most card holders (56%) are actually in this position, Rossman said.
“So, it’s not really debt for them. It’s a balance that they’re paying off,” he explained. “They’re getting rewards, convenience, buyer protections, not paying interest. The other 44%... they’re the ones who are paying a hefty interest rate,” on average over 20%
Rossman added that it is hard to build wealth when paying that much interest. While the New York Fed also said in its recent report that credit card balances decreased by $14 billion to $1.12 trillion in the first quarter, he said that they didn’t drop as much as expected.
Yet, even for people who pay off their cards diligently, new charges continue to spring up because of inflation. Tucker brought up credit card use fees now being charged at some restaurants.
“So I use my credit card. I get free points if I pay it, every 30 days,” said Tucker. “Those points I can turn into cash and make a big payment with them, after it gets to X amount – somebody has got to pay for that.”
To offer these points, the card companies charge restaurants and retail establishments. Now, with inflation pressure, those businesses are increasingly passing the fee along to customers.
“This has been a big issue because inflation has been squeezing business owners as well,” Rossman said. “And more business owners are looking to recoup that interchange fee. So, they’re tacking on a 3% credit card surcharge. Not really the national stores, but an increasing number of smaller local businesses like restaurants and retail shops.”
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Still, he said it is worth it to work on not just making minimum credit card payments.
“I mean, that’s not a good situation. If you make minimum payments towards the average credit card balance – which is a little over $6,000, according to TransUnion – at that average interest rate, a little over 20%, I mean, minimum payments could keep you in debt for 18 years and cost you [$9,500] bucks in interest,” Rossman said.
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