Holiday shoppers spend more on credit cards despite high interest rates

Despite sky-high interest rates, Americans are charging record amounts to their credit cards as the holiday shopping season heats up, risking hefty fees and credit score fallout that personal finance experts say can be mitigated with a little planning.

Inflation, which was running at 7.7% in October, shows some signs of slowing but still hovers around historic highs. And while 37% of American households say their finances are worse now than last year, 74% plan on spending at least as much this holiday season — about $1,455 per consumer — according to a survey by consulting firm Deloitte. But respondents estimated that same budget would cover only about nine gifts this year, down from 16 last year.

Consumers are “going to find ways to combat the challenges they find,” says Rod Sides, global leader at Deloitte Insights. For example, households may cut back on holiday decorations at home to leave more budget for gifts.

Some retailers have said consumers are holiday-shopping earlier than usual in search of deals. As the season progresses, many Americans’ spending will pile onto credit card balances already at a record $866 billion in the third quarter, 19% higher than the same period last year, according to credit reporting agency TransUnion. In some cases, cash-strapped households are leaning on credit to pay for pricier necessities like winter utility bills.

Failing to pay down those card balances on time is costlier than it’s been in decades. To combat high inflation, the Federal Reserve has raised interest rates this year at the fastest clip in 40 years. Those hikes have pushed credit card interest rates to an average of 19.04%, according to Bankrate, surpassing the last record set in 1991 to hit the highest level recorded in data going back to 1985.

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Experts say there are sensible ways to shop with cards this holiday season while safeguarding both your bank balance and credit score.

Ted Rossman, senior analyst at Bankrate.com, suggests stacking discounts. If you have a rewards credit card, for example, look for opportunities to combine cardholder perks with store discounts. The goal is to “find multiple ways to save on the same purchase,” he says. “Use the rewards credit card, assuming that you’re going to pay in full and avoid interest, but combine that with other things like a store coupon or coupon code.”

Rossman also suggests making purchases through retail portals such as Rakuten, an e-commerce site where consumers can earn cash back on purchases, or on perks platforms operated by the major consumer banks, where customers can browse and activate deals and cash-back offers.

As with every holiday season, many retailers are dangling discounts for shoppers who sign up for their own branded store cards, which can slash price tags at the register. But analysts warn that high interest rates and potentially unfavorable terms can trip up shoppers, eroding the hoped-for savings.