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 economic growth.
“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.
The federal 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.
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 post-recession 2010.
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 their card.”
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.
Outlook: more rate hikes coming
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 remarks to reporters, Fed Chair Janet Yellen said the tax cut plans could crank up growth in an economy that is already running on all cylinders. “I think we’re in the vicinity of full employment,” she said. “We’ll be monitoring inflation developments closely.”
But with inflation running below its target of 2 percent, tapping the economy’s gas pedal isn’t a big concern now, she said. What’s more, cuts in taxes could spur investments in productivity, and might even lure more people into the workforce, helping hold inflation back. However, there is little certainty about how the tax measure, not yet finalized, will play out in the economy, she said.
“We still expect ongoing strength of the economy will warrant gradual increases in the federal funds rate,” Yellen said. The majority projection of three rate hikes in 2018 is unchanged from the committee’s last round of projections in September.
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.
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.
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.