Credit Card Debt Just Hit an All-Time High -- and So Did Credit Card Interest Rates

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Without question, Americans really love their credit cards. According to the latest update from the Federal Reserve, credit card debt stood at $1.027 trillion, an all-time high that now surpasses the record that was set about a decade ago. That's great news for a U.S. economy that's approximately 70% based on consumption, but worrisome news for the roughly seven in 10 adults in the U.S. who have at least one credit card in their wallet. 

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If used properly, credit cards can actually be a useful tool that helps save money over the long run. Adhering to the five factors that influence your credit score, and working to push your credit score into the "excellent" or "good" category, can improve your choices when you need a loan, as well as provide you with lower interest rate options, which over the long run could be saving you thousands or tens of thousands of dollars.

Uh-Oh! Credit card APRs just hit an all-time high, too

But there's an even more worrisome addendum to Americans simply hitting a new all-time high in terms of revolving credit card debt. As noted by CreditCards.com on Aug. 2, the national average annual percentage rate (APR) for new card offers climbed to an all-time record high of 16.13%. Prior to 2017, the previous record-high for APRs was 15.29%, implying an 84-basis-point jump in annual lending rates from the all-time high. The fact that the Federal Reserve has raised its federal funds target by 25 basis points on three separate occasions since December 2016 has meant that lenders have passed along interest rate hikes to consumers with credit cards that have variable rate APRs (which is practically all credit cards).

In other words, credit card debt is at an all-time high, and the interest rate card-carrying consumers have to pay to service their revolving debt, if they don't pay it off each month, is at an all-time high. That's not a very good combination.

According to TransUnion, on average, a 25-basis-point increase in lending rates only translates into a $6.45 increase in consumers' credit card balances, with CreditCards.com suggesting that 82% of Americans see a jump of less than $10 a month in financing costs with a quarter-point rate hike. Comparatively, 1% of the population sees their debt-servicing costs increase more than $50 a month with a quarter-point hike.

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Nevertheless, we've seen this story play out before, and it's only a matter of time, if consumers don't keep a watchful eye on their debt and spending habits, before something bad happens. Matt Schulz, CreditCards.com's senior industry analyst, had this to say: "America's credit card balances have never been higher, but there's no reason to think they won't just keep climbing. Combine that with steadily rising interest rates and you have a potentially volatile mix." 

Be smart with your money

These all-time highs serve as a warning that consumers need to be more prudent with their spending habits and their credit cards in general.

Beginning first with spending habits, the single most useful thing consumers can do to improve their chances of not falling into a credit card debt trap is implementing a household budget. A 2013 Gallup poll found that a mere 32% of U.S. households was sticking to a monthly household budget, which is far too low. Without a budget, it's very difficult to get a good understanding of your cash flow, and without understanding your cash flow, you can't optimally adjust your spending and saving habits.

Formulating a budget is considerably easier than it was a decade or more ago. Budgeting software can be found online, which means you can access it from anywhere, wirelessly, and in many cases for free. It also handles all the math for you, which should be a sigh of relief for you math-phobic people out there.

The far tougher challenge is actually sticking to a formulated budget and to that end here are a handful of suggestions:

  • Set up automatic withdrawals from your checking account, which will help keep you honest to your weekly, biweekly, or monthly saving goals.
  • Consider using cash as opposed to credit, since using cash means parting ways with a tangible asset. It's a good way to reduce impulse purchases.
  • Get everyone in your household on board with a budget, and if you live alone, consider meeting monthly or biweekly with like-minded people to track your progress.
  • A central checking account can seem like one big piggy bank. Consider creating separate accounts for budget categories (i.e., entertainment, food, and so on) in order to avoid overspending.

Focus on your credit basics

The other side of this equation to keep yourself out of steep credit card debt involves staying in the good graces of your lenders. Remember, the higher your credit score and the more creditworthy you're seen by lenders, the more the ball will be in your court when it comes to negotiating for new credit cards and for a few other perks I'll note below.

As mentioned above, five factors influence your credit score:

  • Your payment history
  • Your credit utilization rate
  • Your length of credit history
  • Your account mix
  • Your new credit accounts

Your ability to make payments on time, and utilizing less than 30% of your aggregate credit available, combines to account for about 65% of your credit score, with everything else a pretty distance second. Being prudent about your credit usage and paying your bills on time when you do use your credit cards can really boost your credit score in a fairly short amount of time. And a higher credit score gives you a big bargaining chip.

If you're late on a payment, but you've had a long history of on-time payments, request that your lender forgive the late payment. Chances are, more often than not, your lender will overlook a rare late payment, especially if you have a good or excellent credit score. It's far costlier for lenders to find new customers than to appease and keep existing ones with an occasional concession.

Likewise, never be afraid to ask your lender to lower your credit card interest rate. Studies have shown that lenders are more likely than not to lower your rate if you ask. Unfortunately, most people don't ask, because they either don't realize they can or they're afraid they'll be told "no." And let me tell you, there are far worse things in this world than being told "no."

If you follow these credit basics and stay smart with your spending habits, you should have a good chance to avoid becoming an unwanted credit card statistic.

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Sean Williams has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.