Interest rates on nearly all credit cards and home equity lines of credit will rise after this latest rate hike, and borrowers with floating interest rates will quickly notice the difference, said Ted Rossman, senior industry analyst at Bankrate.
“It’s pretty much right away, within a cycle of statements or two,” he said.
At just over 18%, the average annual percentage rate (APR) on new credit cards is within one percentage point of its all-time high of 19% set in July 1991, according to Rossman. “The effect on current credit card borrowers is probably actually worse,” he said, due to the rate hikes the Fed has undertaken earlier this year. “Your credit card is likely already 2.25 percentage points higher than it was in March.”
Despite rising rates, credit card debt is fast approaching the all-time record set in the fourth quarter of 2019, Rossman said.
“What they are doing is borrowing future income by taking on debt. That’s why we are seeing a big increase in credit card lending right now … to maintain their current standard of living,” said Steve Rick, chief economist of CUNA Mutual group.
TransUnion credit agency found that there are more credit cards today and there is more debt on those cards. TransUnion said 161.6 million people in the United States, about half of the total population, had access to a credit card in the second quarter, a jump from 153.3 million a year earlier. Over the same time frame, the average debt per borrower went from $ 4,817 to $ 5,270.
Higher prices are fueling America’s thirst for credit. “Inflation is certainly a significant factor. If the same services and goods they have always consumed are suddenly more expensive, consumers could use credit to help with the short-term financing of those purchases,” said Michele Ranieri, vice president. of US research and consulting at TransUnion. “For many consumers, credit is not just about added debt, it also acts as a necessary spending vehicle.”
Ranieri framed this as a positive development, as long as borrowers can keep up.
“It takes years to accumulate behaviors of new products like BNPL to thoroughly analyze them and incorporate them into consumer credit scores and credit decisions,” he said. “We have worked actively with lenders to ensure that as much debt as possible is reflected in consumer credit reports.”
Lower income borrowers, worse credit adding debt
Bank of America data reflects higher borrowing rates among low-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 early 2021. According to Bank of America, households with an annual income of less than $ 50,000 have a credit utilization rate of about 28%, compared to about 23% for households with incomes greater than $ 125,000.
“We are recognizing that the consumer is under pressure, but strong wage growth, the robust labor market and their higher savings deposit levels … are all shock absorbers,” said David Tinsley, senior economist at Bank of America. Institute.
TransUnion found that over the past year or so, unsecured debt held by subprime borrowers has increased by around four percentage points. Observers fear that if economic conditions deteriorate, this debt could quickly become unmanageable, especially as sub-prime borrowers pay higher interest rates and generally earn less than prime-time borrowers.
Transunion said the major default rate – debt that has been past due for 90 days or more – in the consumer credit landscape is within its pre-pandemic range, but has started to rise.
More debt means less money for Christmas shopping
“It looks like holiday shopping forecasts may be on the wrong side of the inflationary gap,” Rossman said. “There are reasons to think that people will back down.”
“We don’t expect this Christmas to be as solid as it was last Christmas,” Rick said. “It will tighten people’s spending when they spend more money on interest … Something has to give. You just have so much income to distribute.”