A record number of people say they would need to pay for an unplanned $1,000 expense by using their credit card, according to a new survey showing the burden of high prices even as inflation rates ebb from four-decade highs.
One quarter of people said they would rely on credit cards and have to gradually pay off $1,000 in unanticipated costs for something like a car repair or a medical problem, according to a Bankrate.com survey released this week.
That’s the biggest percentage of people saying they would need to finance the un-budgeted $1,000 expense through credit cards since Bankrate began asking about topic in 2014. The number is up from 20% one year earlier and up from 16% in January 2020, the survey noted.
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More than four in ten poll participants (43%) said they could cover the cost with savings, down slightly from the record high of 44% last year who said they could pay with savings.
It’s no surprise the current economic climate is the culprit behind saving less. Around two-thirds (68%) said inflation and increasing costs were the reason they were saving less, the poll said.
In the separate, but widely-watched Federal Reserve question released last year about the capacity to cover an unplanned $400 expense, 68% of Americans told Fed researchers they could cover it with cash, savings or a credit card.
But that might feel long ago at this point.
One inflation gauge on Friday showed a 5% rise in December prices year over year. That’s down from the 5.5% print for November, and well off the 7% high last summer.
But the growing reliance on credit cards is especially challenging because of the climbing interest rates, which would make it even more expensive to carry the balance during a gradual pay off. The “timing couldn’t be worse,” said Mark Hamrick, Bankrate’s senior economic analyst.
After a parade of increases last year to a benchmark interest rate, the Federal Reserve is widely expected to add another next week. The central bank could increase the federal funds rate by another 25 basis points.
It’s a hugely important rate that influences many other borrowing costs and rates — including the annual percentage rates for credit cards.
By late January, the average APR on new credit-card offers was 19.93% according to Bankrate’s data. In early November, average APRs charged past Bankrate’s previously-tallied record high of 19%.
Another average tells the same story. LendingTree said the APR on new card offers was 23.39% in January, up from 22.91% in December. LendingTree researchers said that’s the steepest average rate since they started tracking it in 2019.
“On average, credit-card interest rates are the highest we’ve seen and are slated to go higher as the Federal Reserve continues to hike. Under the best of circumstances, this debt should be paid before costly interest charges hit the account,” Hamrick said.
The irony is that 48% of people in the survey noted that rising interest rates were a reason they were putting less into emergency savings. But rising interest rates also raise the yields from savings accounts.
While interest rates climb, so are aggregate credit-card balances. During 2022’s third quarter, American credit-card debt increased by $38 billion to $930 billion, according to the Federal Reserve Bank of New York. That’s a 15% increase year over year and the sharpest climb in more than 20 years, researchers said.
The fourth quarter earnings from big banks like Bank of America
and Wells Fargo
suggest consumers on the whole are still holding up to the strain.
But others aren’t convinced. “Most of America today has absolutely no money, if you look at it,” personal finance expert Suze Orman said this week on CNBC.
Federal government data on Friday showed the personal savings rate rising to 3.4% in December from 2.9% the prior month as consumers eased off some spending.
That’s a relative rebound from a rate that earlier in the fall had dropped to the second lowest point in statistics stretching back to 1959.