NEW YORK (AP) — The Federal Reserve raised its key rate by another quarter point Wednesday, bringing it to the highest level in 15 years as part of an ongoing effort to ease inflation by making borrowing more expensive.
If you have money to save, you’ll probably earn a bit more interest on it, but the increase will make it even costlier to borrow for homes, autos and other purchases. The interest rate increase comes at a time when credit card debt is at record levels.
Here’s what the increase means for your credit card bill and what you can do if you’re carrying debt:
HOW DOES THE FED DECISION AFFECT CREDIT CARD DEBT?
The Federal Reserve doesn’t directly dictate how much interest you pay on your credit card debt. But the Fed’s rate is the basis for your bank’s “prime rate.” In combination with other factors, such as your credit score, the prime rate helps determine the Annual Percentage Rate, or APR, on your credit card.
The latest increase will likely raise the APR on your credit card 0.25%. So, if you have a 20.4% rate, which is the average according to Bankrate, it might increase to 20.65%.
If you don’t carry a balance from month to month, the APR is less important.
But if, for example, you have a $4,000 credit balance and your interest rate is 20%, if you only make a fixed payment of $110 per month, it would take you a bit under five years to pay off your credit card debt and you would pay approximately $2,200 in interest.
If your APR increases by a percentage point, paying off your balance would take two months longer and cost an additional $215.
Reuters
“U.S. household debt jumps to $16.90 trillion”
By Lindsay Dunsmuir
February 16, 2023
Feb 16 (Reuters) – U.S. household debt jumped to a record $16.90 trillion from October through December last year, the largest quarterly increase in 20 years, as mortgage and credit card balances surged amid high inflation and rising interest rates, a Federal Reserve report showed on Thursday.
Household debt, which rose by $394 billion last quarter, is now $2.75 trillion higher than just before the COVID-19 pandemic began while the increase in credit card balances last December from one year prior was the largest since records began in 1999, the New York Fed’s quarterly household debt report also said.
Mortgage debt increased by $254 billion to $11.92 trillion at the end of December, according to the report, while mortgage originations fell to $498 billion, representing a return to levels last seen in 2019.
Meanwhile credit card balances increased by $61 billion in the fourth quarter while auto loan balances rose by $28 billion, the report said.
Much of the rise in overall debt can be attributed to a tumultuous 2022 in which the U.S. central bank raised its benchmark interest rate from near zero last March to more than 4% by the end of December, the fastest pace of monetary tightening since the early 1980s, as it fought to quash an inflation rate that had surged to a 40-year high.
The aim has been to dampen demand in order to sap heat from the economy, which early last year was severely out of balance with too much money chasing too few properties and goods, and labor shortages in various sectors.
Delinquency rates rose too for credit cards, auto loans and mortgages although the overall share of debt in arrears by more than 90 days still remains below pre-pandemic levels for now.
However, younger borrowers appear to be struggling more to make repayments for both credit card and auto loans.
“Although historically low unemployment has kept consumer’s financial footing generally strong, stubbornly high prices and climbing interest rates may be testing some borrowers’ ability to repay their debts,” said Wilbert van der Klaauw, an economic research advisor at the New York Fed.
The Fed has since raised its policy rate again and it is now currently in a target range between 4.50% and 4.75%, with investors seeing at least two more 25 basis point hikes as likely before the Fed pauses to give time for its actions to permeate through the economy in order to reduce the risk of it tipping into recession.