Average Americans are struggling to pay the bills in 2022 due to a number of reasons. Inflation was already rising in 2021, and circumstances this year have pushed it even further. This has led to a scenario in which people are spending around $40 more on groceries every month.
In addition to high gas prices and increasing costs in all other areas, making ends meet is no longer possible for every individual. As such, Americans are turning to credit cards to make extra funds available.
Credit cards seem like the perfect option. Because they are a type of revolving credit, they’re there when you need them. Simply having a high credit card limit gives people peace of mind that they can get through a tough month.
But are credit cards really the best option if the tough times look unlikely to end? And are banks taking advantage of increased credit card use?
The problem with credit cards in 2022
Credit cards are unsecured loans and are therefore risky for banks. If you don’t pay what you are supposed to every month, there is little they can do to get their money back. While they will report it to credit bureaus, that will only affect you next time you apply for credit.
Because unsecured loans are risky, they come with high interest rates. That is always true of credit cards. The idea is for you to pay the money back as soon as possible to avoid spending hundreds of dollars on interest.
However, the higher the interest is, the more difficult it is to pay back the balance. In 2022, with the Federal Reserve raising interest rates in an attempt to stem inflation, credit card rates are rising too. Banks are now charging record annual percentage rates (APRs) on credit cards because of this.
In theory, high interest rates do not need to impact you. But inflation has been getting worse, not better. The funds spent by credit card holders are not being repaid. On the contrary, people are spending more of their balances each month.
In this scenario, credit cards are getting people out of sticky situations but they come at a cost. Eventually, the chickens will come home to roost. People will have maxed out their credit cards and have no way of paying even the interest.
As mentioned, it makes sense that APRs are high, considering the high benchmark set by the Fed. However, are these rates truly justifiable?
Banks may be taking advantage of clients
The Consumer Financial Protection Bureau (CFPB) is not convinced. The consumer watchdog is investigating the record high rates. The problem is that while banks are using the high benchmark rate as justification for their own high rates, they did not lower their rates in the same way when the benchmark was close to zero. From March 2020 until early this year, the Federal interest rate was at record lows, but credit card rates were not.
The argument that risk is higher now due to inflation may not hold up either. The reality is that banks are still issuing credit cards to customers with bad credit and offering higher limits to people who already have hefty balances. High risk should mean that banks are more prudent with the credit they provide.
There is huge demand for credit at the moment, and it seems like this is what is truly driving high interest rates on credit cards. Banks may be raising rates because they can increase their own profits at the expense of desperate clients.
Margaret Seikel, a financial analyst at the CFPB, put this into context with the following example. At the current rates, a person with a $5,000 credit card balance will pay $1,000 in interest alone over the course of a year.
It is clear that credit card interest rates are costing Americans a lot of money in a time when money is tight. The problem is that people do not have all that many alternatives. When interest rates are low and inflation is under control, credit cards can be extremely useful. But at the moment, they may be leading people further into debt with no easy way out.
It remains to be seen whether the CFPB finds any wrongdoing. For now, Americans with credit cards will have to grapple with record interest rates.