Holiday Shoppers Face Rising Credit Card Balances as Interest Rates Climb

Shoppers are gearing up for holiday spending, but underneath the festive atmosphere, retailers may face a growing challenge as credit card balances rise. The Federal Reserve's recent interest rate hikes have made borrowing on credit cards more expensive, particularly for those who carry balances from month to month. This increase in borrowing costs is driven by a rise in credit card delinquencies, though they are still below levels seen during the Great Recession. Additionally, student loan payments have resumed, adding to Americans' debt burdens.

Retailers are uncertain about how these factors will impact their bottom line until January or February. Retailers have expressed concerns about credit card payments, with some citing higher delinquencies. Rising interest rates have also affected consumer debt, including student loans, auto loans, and mortgages. Despite these challenges, consumers have continued to spend, fueled by pent-up demand after the COVID-19 pandemic.

Average interest rates on U.S. credit cards have reached around 21%, up from 16% a year ago, and retailer-issued cards have an average interest rate of nearly 30%, a record high. While holiday forecasts suggest consumers are planning to spend more this season, there is a segment planning to spend less, with many remaining cautious about their budgets.

Some consumers may engage in riskier financial behavior during the holiday season, such as accumulating high credit card balances they can't afford or using buy now, pay later services that can come with fees. A growing number of Americans are considering these buy now, pay later options. Balances are becoming harder to pay down due to accumulating interest. Credit card delinquencies, rather than total debt, are a better measure of consumer financial health, and a robust labor market is key to consumer spending.

Despite potential challenges, a strong labor market gives reason for optimism about the holiday season. Some shoppers are taking precautions, like paying in cash or with debit cards, to stay within their budget and avoid accruing more credit card debt.