Sign of troubles ahead? Credit card debt is growing faster than inflation

America’s credit card addiction is growing faster than inflation, suggesting that higher prices aren’t the only thing keeping consumers highly indebted.

According to a new report from TransUnion, the average U.S. credit card balance at the end of the second quarter was $6,329, up 4.8% from last year.

By comparison, the government’s latest Consumer Price Index (CPI) showed inflation slowing to a 3% annual rate in the 12 months through June.

Either Americans’ spending habits are outpacing inflation, or CPI masks hidden costs that aren’t showing up in official government data. In either case, the average American’s finances are deteriorating rapidly.

“Consumers across the board continue to engage with a wide range of credit products, with continued balance growth across credit risk tiers,” said Michele Raneri, vice president of U.S. research and consulting at TransUnion.

Meanwhile, subprime borrowers saw their credit card balances spike 12.3% over the past year.

TransUnion’s Paul Siegfried said these borrowers “seem to be experiencing more significant inflationary pressures,” which means they’re relying more on their credit cards to fill in the gaps.

Higher loan balances are just the tip of the iceberg of subprime borrowers' financial troubles, as they also pay much higher interest rates on their credit cards.

The crushing blow of higher interest rates

The TransUnion report said consumers are comfortable taking out more debt because they expect the Federal Reserve to begin cutting interest rates very soon.

While they may be right, interest rates on credit cards aren’t expected to decline in any meaningful way.

This is especially true for subprime borrowers, who typically pay six to eight percentage points higher interest than their peers with better credit scores, according to Forbes.

But regardless of their credit score, Americans have seen their interest payments soar over the past decade.

As Creditnews reported, average credit card APRs have nearly doubled since 2013. In fact, APRs rose during the years when the Fed kept interest rates near zero.

According to Federal Reserve data, credit card companies’ average APR margins increased from 9.6% to 14.3% over that period.

One reason credit card companies can charge high APRs is the lack of competition in the lending market, according to the Consumer Finance Protection Bureau (CFPB).

“Americans would be better off with newer entrants or smaller players in the market,” said CFPB director Rohit Chopra.

Consumers who have the opportunity to switch to a smaller credit card provider can end up saving “hundreds and hundreds of dollars over the course of the year,” Chopra said.

High interest rates and growing credit card balances mean “consumers are struggling with their payments,” said Charlie Wise, the senior vice president of global research and consulting at TransUnion.