America’s addiction to credit cards is on the rise. A Fed rate hike will make it more painful

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

“It’s immediate, within an expression cycle or two,” he said.

At more than 18%, the average annual percentage rate (APR) for new credit cards is within a percentage point of 19% set in July 1991, according to Rossman. “The impact on existing credit card borrowers is probably worse,” he said, given the Fed’s rate hikes already this year. “Your credit card is likely to be 2.25 percentage points higher than it was in March.”

Despite rising rates, credit card debt is quickly approaching the historic mark set in the fourth quarter of 2019, Rossman said.

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

“Future income is what they’re doing to take on debt. That’s why we’re seeing a huge increase in credit card borrowing right now … to maintain their current standard of living,” said Steve Rick, chief economist at CUNA Mutual. the team

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

TransUnion credit bureau found that there are more credit cards today, and more debt on those cards. TransUnion said 161.6 million people in the U.S. — roughly half of the total population — had access to a credit card. in the second quarter, a jump of 153.3 million from a year earlier. During the same time period, the average debt per borrower increased from $4,817 to $5,270.

Higher prices are fueling America’s hunger for credit. “Inflation is certainly a significant factor. If suddenly the same services and goods that they have always consumed become more expensive, consumers can use credit to help finance those purchases in the short term,” said US Vice President Michele Ranieri. research and consulting at TransUnion. “For many consumers, credit is not just additional debt, but also a necessary means of spending.”

Ranieri framed this as a positive development, as long as borrowers can continue.

“The fact that more consumers have access to credit is positive, if we do not see a significant increase in arrears,” he said. However, he acknowledged that Buy Now, Pay Later plans, which are typically not included in regular bank and consumer credit reports, can mask the true picture of some borrowers’ positions.

“It takes years to accumulate new product behaviors like BNPL, analyze them accurately and feed them into consumer credit scores and credit decisions,” he said. “We have actively worked with lending institutions to ensure that as much debt as possible is reflected on consumer credit reports.”

Loans with lower income, worse credit adding to the debt

Data from Bank of America reflect higher rates of debt among lower-income Americans. Credit utilization, a ratio of how much available credit a person has used as a percentage of their credit limit, has been rising since the start of 2021. According to Bank of America, households with an annual income of less than $50,000 have approximately 28% credit. usage rate, compared to 23% of households with incomes over $125,000.

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

TransUnion found that over the past year or so, unsecured debt held by subprime borrowers has risen by roughly four percentage points. Observers worry that if economic conditions turn sour, that debt may become unmanageable quickly, especially since subprime loans pay higher interest rates and generally earn less than prime borrowers.

Transunion said the rate of serious delinquencies – debt that is 90 days or more past due – in the consumer credit landscape is in the pre-pandemic range, but has begun to rise.

Some see that as a worrying sign, especially with rate hikes on the table between now and the end of the year that will push interest rates even higher for borrowers. “We’re seeing delinquencies go up a little bit, especially around subprime. There are some warning signs, especially around margins,” Rossman said.

More debt means less money for holiday shopping

The combination of higher interest rates and prices across the board could be a headwind for retailers this holiday season, especially Rising home heating costs make the average family budget even bigger.
How does inflation affect my standard of living?

“It looks like the forecast for holiday shopping may be on the wrong side of the inflation part,” Rossman said. “There are people who think they’re going to back down.”

Some executives have already sounded the alarm, and the next round of corporate earnings will indicate whether the dominoes have started to fall. Last week, FedEx reported weaker-than-expected results and withdrew full-year guidance, raising concerns on Wall Street about what that means for the coming months, including the all-important holiday season for retailers.

“We don’t expect this Christmas to be as strong as previous Christmases,” Rick said. “People’s spending is going to get squeezed when they spend more money on interest… Something’s got to give. You only have so much income to spread around.”