America’s dependence on credit cards is growing. The Fed rate hike will make it more painful

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.

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

“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.

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

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.

“The fact that more consumers have access to credit is good as long as we don’t see a significant increase in defaults,” he said. However, she acknowledged that the rapid adoption of Buy Now, Pay Later plans, which typically don’t get caught in conventional banking and consumer credit dealings, could obscure the real picture of some borrowers’ positions.

“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.

Some see this as a worrying sign, especially with further rate hikes on the table between now and the end of the year that will raise borrowers’ interest rates even more. “We are starting to see a slight increase in defaults, especially in sub-prime. There are some warning signs, especially around the margins,” Rossman said.

More debt means less money for Christmas shopping

The combination of higher interest rates and higher overall prices could be a hurdle for retailers during the holiday season, especially if Rising domestic heating costs devour the average family’s budget even more.
How does inflation affect my standard of living?

“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.”

A number of executives have already sounded the alarm and the next round of corporate earnings will indicate whether the dominoes are already starting to fall. Last week, FedEx reported weaker-than-expected results and withdrew its full-year forecast, sparking concern on Wall Street over what this heralds for the coming months, including the all-important retailer holiday season.

“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.”

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