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Susan Tompor: Why Fed rate hike can drive you to pay down credit cards

McClatchy-Tribune Information Services

June 25, 2018


For roughly a decade, millions of consumers could afford to focus on the rewards and ignore the rates on their credit cards.

"They haven’t really had to think too much about interest rates because they didn’t change that much," said Robert A. Dye, chief economist at Comerica Bank.

Game over. Get ready for higher rates on your credit cards after more rounds of Fed rate hikes this year and next. Many consumers may not realize it but the interest rates on credit cards aren’t fixed. Most credit cards have what are called "variable rates."

As a result, the interest rate consumers pay on credit card debt typically ticks up each time the Federal Reserve raises rates.

Last week, the Fed raised rates by a quarter-point once again. The target range for the federal funds rate will be 1.75 percent to 2 percent. A rate hike by the Fed translates into a higher prime rate.

The Fed said economic activity has been "rising at a solid rate."

"Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly," the Fed said in a statement Wednesday.

As a result, consumers can expect higher rates on credit cards, home equity lines of credit and other adjustable-rate loans.

"Consumers will need to be more savvy about their spending and how they finance it as a result of rising interest rates," Dye said.

If you don’t pay off your credit card every month, you’re looking at slightly higher monthly minimums and higher annual percentage rate on the credit card balance.

In many cases, higher interest rates can hit in the first billing period after a change in the prime rate. Bank policies vary; some can change quarterly.

"When the Fed raises rates, the APR on your credit card is going to rise pretty quickly," said Matt Schulz, senior industry analyst for CreditCards.com.

The price tag for the latest Fed rate hike will be an extra $1.6 billion this year alone for consumers who are carrying debt on their credit cards, according to an analysis by WalletHub.

And that’s the added cost of just one rate hike. Many economists expect two more rate hikes in 2018. And many are forecasting another three rate hikes in 2019.

Consumers began the year with more than $1 trillion charged on their credit cards for the first time ever. But consumers did repay $40.3 billion in credit card debt during the first quarter — the second biggest quarterly payout ever, according to Jill Gonzalez, analyst for WalletHub.com.

Many times, consumers use their tax refund cash or a year-end bonus to pay down debt in the beginning of the year, she said. But this year, consumers appeared to act more aggressively to tackle their debt.

"People are realizing they’re not keeping up with their bills. They’re falling behind," Gonzalez said.

About 41.2 percent of all households carry some credit card debt, according to a recent study by ValuePenguin, a consumer data website. Researchers found the median debt per American household to be $2,300, while the average debt stands at $5,700 based on the most recent data from the Survey of Consumer Finances by the U.S. Federal Reserve. This information comes from data collected up through to the year 2013.

The average credit card debt for those younger than 35 was $5,808 but credit card debt goes up significantly for other age groups, according to the study.

Consumers age 35 to 44 had an average credit card debt of $8,235. Consumers age 45 to 54 had an average credit card debt of $9,096.

In metro Detroit, the average credit card debt was $5,367 in 2018 — up from $4,942 five years ago. That’s an 8.5 percent increase in the past five years and a 4 percent jump since 2016, according to ValuePenguin.

Kurt Rankin, economist for the PNC Financial Services Group, said consumers overall are confident in their job prospects and the potential for higher wages, given the low unemployment rate.

As a result, they’ve been comfortable taking on more credit card debt in recent years. In general, consumers shouldn’t be feeling overburdened by the level of credit card debt they’re carrying, he said.

Even so, some are concerned that balances could become more difficult to manage for some consumers as rates increase in the next year or so.

"Some consumers will pay their debt more quickly," Dye said. "Others will start to feel more stress as their debt balances become more difficult to manage."

"What I am concerned about is how consumers will handle the added financial stress when job growth cools," Dye said.

Here’s a look at useful strategies to deal with the higher cost of credit card debt:

Transferring to a lower rate card remains an option

The average rate on credit cards is 16.75 percent but the average could go up to 17.5 percent in the next year, according to CreditCards.com.

While rates on variable rate credit cards have gone up, credit card issuers are still offering 0 percent rates for a limited time, such as a 18 months or 21 months, that can allow a consumer to pay off their debt more quickly.

"A balance transfer card, if used wisely, can save you an awful lot of money," said Schulz, of CreditCards.com.

Wisely, of course, would mean using that zero percent window to pay down the debt you already built up — and not take on more debt.

"Ideally, you’d be able to pay off that entire balance within that introductory period. But that’s not reality for a lot of folks," Schulz said.

Look for a card with a low balance transfer fee. Some credit cards are pushing those fees to 5 percent — which means you’d pay $500 on a $10,000 balance transfer.

Pay attention to the length of the zero percent introductory offer — and get a clear idea of what rate you’d pay afterwards. Typically, you’d not be able to transfer a balance from one card to another card being offered at the same bank.

Shopping around for a better rate is essential

Already, credit card issuers appear to be less likely to target a mass audience by offering rewards to anyone who comes along. They don’t want to just sign up credit card rewards gamers or consumers who sign up for new cards to get bonus rewards.

Instead, card issuers want to offer incentives to current customers or others who are more likely to use the card for a long time, Schulz said.

"Basically, banks want you to keep the card you get and to hang around," Schulz said.

If you get an offer for a lower rate from another bank, it does not hurt to reach out to your bank to ask if they’d match that rate.

"They’ll almost certainly listen to you and your chances for success are higher than you might think," Schulz said.

Researching different offers from the same bank can pay off

The bonus rewards or special deals that you spot in a bank branch can vary from what the same bank is offering online or via the mail that arrives at your house. Seriously.

I made this mistake myself and lost out on a rewards offer by signing up at the bank branch before looking into what was offered as a sign-up bonus online.

It’s best not to be impulsive and swing at the first pitch. Take time to review any offers and compare what’s being offered in other channels.