US Federal Reserve’s interest rate hikes have not deterred lenders from increasing consumers’ access to credit. According to The Wall Street Journal, banks have opened up a record $89 billion in new credit card accounts in the first quarter of this year, while also raising spending limits on 18.4 million existing accounts. As a result, Americans’ collective credit card bill has surpassed $1 trillion for the first time as of August 2023.
While this could mean additional revenue for banks through unpaid balances and merchant fees, it poses a risk for consumers. Unsolicited increases in credit limits often lead to excessive spending and debt. However, lenders like Discover, Synchrony Financial, and Capital One have expressed intentions to support credit line increases and offer credit cards this fall, as noted on LinkedIn.
A recent report by JD Power sheds light on concerning trends in credit card debt. The report reveals that 51% of credit card holders are maintaining revolving debt, while the average interest on this debt is 14.8%. Among financially unhealthy cardholders, the percentage of revolving debt jumps to 69%. Not surprisingly, these cardholders do not believe that credit cards promote good financial decisions.
To address card debt, some cardholders are using payment plans that resemble loans. However, usage of these plans is erratic, ranging from 9% to as high as 23%, with financially healthy or overextended individuals being the primary users.
In May 2023, TransUnion’s Q1 2023 Quarterly Credit Industry Insights Report highlighted the dependence on credit to manage household budgets. The report revealed that credit card and unsecured loan balances have reached record or near-record highs due to elevated inflation and rising interest rates.
Michele Raneri, vice president of U.S. research and consulting at TransUnion, commented on the situation, stating that strong credit positions have allowed consumers access to more credit products. However, it remains unclear whether these balances will continue to grow in the near future, as consumers moderate borrowing and lenders closely evaluate potential risks when extending credit.
Despite a slight decrease of 1.5% quarter-over-quarter, credit card balances remain near record highs at $917 billion, which is a nearly 20% year-over-year increase. The impact of this surge in credit card debt on consumers’ financial health remains to be seen.
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