Interest rates on nearly all credit cards and home equity lines of credit will increase after this latest rate hike, and borrowers with variable rates will quickly notice the difference, said Ted Rossman, senior industry analyst at Bankrate.
“It’s pretty much on the spot, within a cycle of a statement or two,” he said.
At just over 18%, the average annual percentage rate (APR) on new credit cards is within a percentage point of an all-time high of 19% set in July of 1991, according to Rossman. “The impact on existing credit card borrowers is actually probably worse,” he said, due to the rate hike the Fed has already done this year. “Your credit card will probably be 2.25 percentage points higher than it was in March.”
Rossman said that despite rising interest rates, credit card debt is fast approaching the record high set in the last quarter of 2019.
said Steve Rick, chief economist at CUNA Mutual Group.
TransUnion Credit Bureau I 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 — nearly half of the total population — have access to a credit card In the second quarter, a jump from 153.3 million a year ago. In the same time frame, the average debt per borrower rose from $4,817 to $5,270.
High prices fuel America’s appetite for credit. “Inflation is certainly an important factor. If the same services and goods they’ve always been consuming are suddenly more expensive, consumers may use credit to help finance the short-term of those purchases,” said Michelle Ranieri, Vice President of the United States. Research and consulting at TransUnion. “For many consumers, credit is not only about added debt, but also serves as a necessary means of spending.”
Ranieri phrased this as a positive development – as long as borrowers can keep up.
“It takes years to accumulate new product behaviors like BNPL to accurately analyze and incorporate them into consumer credit scores and credit decisions,” she said. “We have worked actively with lenders to ensure that as much debt as possible is reflected in our consumer credit reports.”
Low-income borrowers, worse credit adds debt
Bank of America data reflects higher borrowing rates among lower-income Americans. Credit use, which is a proportion of the amount of available credit a person has used as a percentage of their credit limit, has been on the rise since early 2021. According to Bank of America, households with annual incomes of less than $50,000 have a roughly 28% credit ratio use, compared to about 23% for households with incomes over $125,000.
“We acknowledge that the consumer is under pressure, but strong wage growth, a robust labor market, and high levels of savings deposits … are all protective factors,” said David Tinsley, chief economist at Bank of America.
TransUnion has found that over the past year or so, unsecured debt held by sub-prime borrowers has risen about four percentage points. Observers worry that if economic conditions worsen, this debt could quickly become unmanageable, especially as mortgage borrowers pay higher interest rates and generally earn less than prime borrowers.
Transunion said the critical delinquency rate — debt that is past due by 90 days or more — across the consumer credit landscape is within its pre-pandemic range, but is starting to rise.
More debt means less money for holiday shopping
“It appears that holiday shopping expectations may be on the wrong side of the inflation gap,” Rossman said. “There are reasons to believe that people will back off.”
“We don’t expect this Christmas to be as strong as last Christmas,” Rick said. “It will put pressure on people to spend when they spend more money on benefits…Something has to be given. You just have so much income to distribute.”
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