Home Credit card America’s reliance on credit cards is growing. Fed rate hike will make things more painful

America’s reliance on credit cards is growing. Fed rate hike will make things more painful

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Interest rates on nearly all credit cards and home equity lines of credit will rise after this latest rate hike, and borrowers with variable interest rates will quickly notice the difference, said senior industry analyst Ted Rossman. at Bankrate.

“It’s pretty much right now, within a reporting cycle or two,” he said.

At just over 18%, the average annual percentage rate (APR) on new credit cards is less than a full percentage point from its all-time high of 19% set in July 1991, according to Rossman. “The effect on existing credit card borrowers is probably worse,” he said, due to the rate hikes the Fed has already undertaken this year. “Chances are your credit card is already 2.25 percentage points higher than it was in March.”

Despite rising rates, credit card debt is fast approaching the all-time high set in the fourth quarter of 2019, Rossman said.

Personal finance professionals say the best strategy when rates rise is to pay down or consolidate debt, but as the prices of all kinds of goods and services rise, Americans are gorging themselves on debt of all kinds. Borrowers are opening new cards and charging more on the ones they already have.

“What they’re doing is borrowing future income by going into debt. That’s why we’re seeing a huge increase in credit card borrowing right now…to maintain their current standard of living,” Steve Rick said. , Chief Economist at CUNA Mutual. Band.

In August, the Federal Reserve Bank of New York said total household debt rose $312 billion in the second quarter to a total of $16.15 trillion. Credit cards were a big cause: in the second quarter, 233 million new credit accounts were opened, the largest increase since 2008. Of the new debt that accumulated during this quarter, 46 billion dollars were credit card debt.

TransUnion Credit Bureau found that there are more credit cards today and there are more debts on these cards. TransUnion said 161.6 million people in the United States – about half of the total population – have access to a credit card in the second quarter, a jump from 153.3 million a year earlier. During the same period, the average debt per borrower rose from $4,817 to $5,270.

Rising prices are fueling America’s appetite for credit. “Inflation is definitely a big factor. If the same services and goods they’ve always consumed are suddenly more expensive, consumers can use credit to help with short-term financing of those purchases,” said Michele Ranieri, Vice President of the United States. research and consulting at TransUnion. “For many consumers, credit is not just additional debt, but also serves as a necessary expense vehicle.”

Ranieri called this a positive development – ​​as long as borrowers can keep up.

“The fact that more consumers have access to credit is positive until we see a significant increase in delinquencies,” she said. However, she acknowledged that the rapid adoption of Buy Now, Pay Later plans, which are not usually reflected in conventional banking and consumer credit reports, could cloud the true picture of some debtors’ position.

“It takes years to accumulate the behaviors of new products like BNPL in order to analyze them accurately and integrate them into consumer credit scores and credit decisions,” she said. “We have been actively working with lenders to ensure that as much debt as possible is reflected in consumer credit reports.”

Low income borrowers, worse credit adding debt

Bank of America data reflects higher borrowing rates among lower-income Americans. Credit utilization, a ratio of the amount of available credit a person has used as a percentage of their credit limit, has been increasing since the start of 2021. According to Bank of America, households with annual incomes below $50 $000 have a credit of about 28%. utilization rate, compared to about 23% for households with income over $125,000.

“We recognize that the consumer is under pressure, but strong wage growth, a robust labor market and their higher savings deposit levels … are all buffers,” said David Tinsley, senior economist at Bank of America. Institute.

TransUnion found that over the past year, unsecured debt held by subprime borrowers has increased by about four percentage points. Observers worry that if economic conditions deteriorate, that debt could quickly become unmanageable, especially since subprime borrowers pay higher interest rates and typically earn less than prime borrowers.

Transunion said the rate of serious default — debt past due for 90 days or more — in the consumer credit landscape is within its pre-pandemic range, but has started to rise.

This is seen by some as a troubling sign, especially with further rate hikes on the table between now and the end of the year that will raise borrowers’ interest rates even further. “We’re starting to see delinquencies go up a bit, especially around subprime. There are sort of warning signs, especially around the margins,” Rossman said.

More debt means less money for holiday shopping

The combination of higher interest rates and higher prices overall could be a headwind for retailers this holiday season, especially if rising home heating costs eat up even more of the average family’s budget.
How does inflation affect my standard of living?

“It looks like the holiday shopping forecast is on the wrong side of the inflation divide,” Rossman said. “There are reasons to think that people will withdraw.”

A number of executives have already sounded the alarm bells, and the next round of corporate earnings will show if the dominoes are already starting to fall. Last week, FedEx reported weaker than expected results and withdrew its full-year forecast, raising concerns on Wall Street about what this portends for the months ahead, including the all-important winter season. retailer parties.

“We don’t expect this Christmas to be as robust as it was last Christmas,” Rick said. “It’s going to take a toll on people’s spending when they spend more money on interest…Something has to give. You only have a limited amount of income to split.”