Card APRs, other variable loans headed up 0.25 percent
Expert on consumer credit laws and regulations
The U.S. central bank voted Wednesday to raise interest
rates for the third time this year, raising costs for many consumer loans – leading
with credit cards.
Solid economic conditions gave the Federal Reserve leeway to
hike its base rate, the federal funds rate, without putting the brakes on
“The labor market has continued to strengthen and … economic activity has been rising at a solid rate,” since the last meeting of the Federal
Open Market Committee in November, according to the statement released at
the end of a two-day meeting. The committee’s vote moves the benchmark rate up
one-quarter of a point, to a range of 1.25 percent to 1.50 percent.
funds rate influences short-term rates throughout the economy. Banks raise
and lower their prime lending rate in step with the federal funds rate.
Variable rate credit cards – including almost all general-purpose cards –
adjust their APRs according to changes in the banks’ prime rate.
Credit card APRs to increase
The bottom line: most people’s credit card APRs will go up 0.25 percent
in this billing statement or the next one. Some cards wait until the end of the
quarter to hike rates.
For the average cardholder’s balance of $5,200, the
quarter-point hike means an increase of about $1 a month just to carry the
same amount of debt. This being the third hike this year, people who carry a
balance will see APRs 0.75 percent higher than they started out with this year.
(Use the quarter-point
interest rate calculator to gauge the impact on your monthly payments.)
“Rates are still pretty low,” said Robert Frick, economist
at Navy Federal Credit Union. But when Fed rates rise, “credit cards are one of
the first kinds of debt to feel the hit.” As the Fed hike filters through
credit markets, other consumer loan rates will rise as well, he said.
Credit card holders who carry a balance can, and should, take actions now to minimize the cost.
“Rates are still pretty low, [but when Fed rates rise] credit cards are one of the first kinds of debt to feel the hit.”
Impact on consumers
The higher rates come as consumers’ card
debt grows. Balances on credit cards
have been climbing since 2011, after a steep plunge during the Great Recession.
Now total balances have passed the $1 trillion mark and are approaching their
old peak level, set in the debt-laden days before the recession.
The higher debt load may be starting to strain some
household budgets. Newly delinquent
accounts are rising, according to the Household Debt and Credit report by
the Federal Reserve Bank of New York. Overall,
late-payments are still at relatively low levels. Seriously delinquent credit
card accounts, meaning 90 days past due, made up about 7.5 percent of total
balances in the third quarter of 2017 – roughly half their peak in
Time to shop for lower-APR cards
While the average delinquencies are low, “you have to be
careful of averages,” Frick said. “There are some cohorts where it’s having an
impact – you see reports of people starting to charge everyday expenses on
Many cardholders can more than wipe out the higher rates by
shopping around for a lower-rate card, Frick said. “This might be a wakeup call
to look at their rates … there’s a
tremendous pool of people who have just let balances rise on a convenient card
they got for points or whatever.”
Doing a balance transfer to a card with an
APR that is 3 percentage points lower can wipe out the impact of the Fed hike and
save substantially on monthly payments, Frick said.
“This might be a wakeup call to look at [credit card] rates … there’s a tremendous pool of people who have just let balances rise on a convenient card they got for points or whatever.”
Outlook: more rate
Projections released with the FOMC statement predict three more quarter-point hikes in 2018. Whatever strains of carrying debt exist now will
grow as interest rates ratchet higher.
Economists say the modest pace of rate increases could be
stepped up if the tax cut bill before Congress becomes law. The additional
billions in spending that would likely be unleashed would pump up the economy
faster, spurring the Fed to move interest rates back toward their long-run
normal levels to keep inflation in check.
“Even without tax cuts, 2018 is likely to see growth around
2.5 percent,” TD Economics Senior Economist James Marple wrote in a research
note. “With increasing prospects for
fiscal stimulus to push growth even higher, the Federal Reserve will continue
to remove monetary accommodation.” Translation: more hikes in the federal funds
rate, and potentially other moves to raise rates in the economy.
In addition to
raising its federal funds rate, the FOMC is starting to reduce the size of its
balance sheet – a source of money supply for the banking system – a move that
chiefly affects long-term rates.
Hotter economy to
bring higher paychecks?
With the jobless rate already at a low rate of 4.1 percent, the
extra economic fuel from a tax hike could heat up growth in wages – and
inflation, economists say. After years of low inflation in the slow-growth
recovery, that could be a welcome development, but one that would put Fed rate
increases on a faster schedule.
So far, wages have been growing 2.5 percent in the past
year, slower than an economy at full employment would provide, Regions Bank
Chief Economist Richard Moody wrote in a research note. “That said, with
overall economic growth remaining solid, the labor
market slack that does remain is being steadily pared down,” he wrote, “and as
this continues to be the case, earnings growth will respond.
5 ways to offset rising card APRs
Credit card rates are expected to rise after the Fed voted to raise interest rates for the third time this year. Here are five actions credit card holders who carry a balance can, and should, take to minimize the cost:
For further details and advice, see our Guide to rising credit card interes rates.
See related: Fed: Card balances surged by $8.3 billion in October, NY Fed: Credit card delinquencies continue to rise
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