Debt levels have increased significantly in the last 10 years in the United States, with credit card and student loan balances leading the way. Although credit card balances dipped slightly during the COVID-19 pandemic, they’ve come roaring back with a vengeance in the past few years.
Amidst significant economic uncertainty, many consumers are left wondering what the coming months and years will hold. While we can’t predict the future, we’ll analyze this situation and explore potential scenarios for the period ahead.
Fed data reveals a new peak in credit card balances
In February, the Federal Reserve Bank of New York reported that credit card balances reached $1.21 trillion in the fourth quarter of 2024. That figure was up $45 billion in Q4 alone and 4% from the previous year. The report shows that all non-housing debt has been on an upward trend, but student loan balances and credit card debt have increased the fastest.
The $45 billion increase in credit card balances represented more than half of the total increase in household debt, which rose by $93 billion in the fourth quarter. In addition, credit card delinquencies and auto loans ticked up in the quarter.
Credit cards usually come with a high annual percentage rate (APR), the interest you pay on the balance, including extra costs. When the Federal Reserve increases the baseline interest rate, it leads to an uptick in credit card APRs. This leaves consumers paying more; Americans pay $120 billion in annual credit card interest and fees.
If the Federal Reserve lowers the baseline interest rate, it can relieve consumers with lower credit card APRs. However, with so much economic uncertainty in 2025, there may only be a modest drop in interest.
Interest rates may drop slightly
Lower interest rates generally mean lower APRs on everything from credit cards to mortgages. This not only makes borrowing cheaper, but it tends to stimulate the economy and drive increases in spending. This is often good for businesses and consumers alike, and both sides have likely hoped for some interest rate relief in 2025.
Fortunately, some interest rate relief may be coming. Financial markets show a near certainty that interest rates will drop at least a quarter percent by the end of the year and a 90% chance of a half-percent drop. If that comes to pass, it means lower rates on credit cards, mortgages, auto loans, and other forms of borrowing.
That’s good news for consumers, but cheaper borrowing usually means more spending. That, in turn, increases inflation, which can prompt an increase in interest rates. The ongoing question is whether the Fed can strike the right balance between interest rates and inflation. The hope is that it can make borrowing cheap, but not so cheap that it must increase interest rates again.
➤ SEE MORE:What is the average credit card interest rate?
Why credit card balances are still a problem
Financial markets expect a slight drop in interest rates in 2025, which may provide some relief to consumers feeling the squeeze of higher credit card bills. Current predictions show that the Fed will likely cut rates by half a point by the end of the year, which could mean a slight drop in credit card APRs.
However, credit card balances are still a problem, says Ben Loughery, CFP at Lock Wealth Management. “Any time there are higher balances, this means higher interest payments,” Loughery says. He says this could mean delinquencies if wages don’t keep pace.
In addition, no one knows the outcome until the Federal Open Market Committee (FOMC) holds each of its eight annual meetings. The committee recently held its second meeting of the year, holding rates steady. Six meetings remain in 2025. “If inflation remains stickier in 2025, rate cuts could be delayed which would keep the credit card APRs higher,” Loughery says. He adds that consumers should focus on their debt issues and not rely on rate cuts for relief.
How to reduce your credit card balances
Although rate cuts could be on the way in 2025, they may be modest and not significantly reduce monthly credit card bills. In the near term, people grappling with high credit card bills should focus on reducing balances rather than hoping for lower rates.
If you’d like to reduce your credit card bills, there is no magic bullet to help you reach your goal. Generally, it involves paying more than the minimum, sometimes using a credit card debt payoff strategy like the debt avalanche or debt snowball. Either way, you pay as much as possible to attack your credit card balances. Reducing your balances quickly can significantly reduce the total interest you pay.
➤ SEE MORE:How to use your tax refund to reduce credit card debt
Some consumers may have luck negotiating their interest rates. This usually involves calling your credit card issuer and requesting a reduction; some issuers may value your loyalty as a customer and reduce your APR. Alternatively, you can try opening a credit card with a 0% introductory APR or a debt consolidation loan with a lower APR than your cards.
