It is three weeks before Black Friday, but the Federal Reserve is about to make the post-holiday debt hangover a little more intense.
By the time the latest rate hikes filter through the very rate-sensitive credit card industry and pump up customers’ annual percentage rates a little more, experts say it will be some point in December 2022 or January 2023. Right in time for many holiday gifts and expenses to post on credit cards bills — and there to make the costs of a carried balance a little extra expensive.
Every year, many people accumulate credit card debt through the holiday season, pay it off in the early part of the following year and then repeat the process.
What’s different now is the presence of four-decade high inflation, coupled with fast-rising interest rates that the Fed hopes will ultimately cool those rising prices, although without sending the economy to a recessionary thud.
Wednesday’s rate move is the fourth straight 75-basis-point rate hike to the federal funds rate, taking it to the 3.75% -4% range, when it was near zero last year’s holiday season. By now, Americans are all too acquainted with 2022’s fast-rising interest rates. They just haven’t gone through a Christmas and Hanakkuh with it yet.
“It’s not the time to overspend and have a problem with paying your bills later. We know the economy is sending mixed messages,” said Michele Raneri, vice president of financial services research and consulting at TransUnion
TRU,
-4.31%,
one of the country’s three major credit reporting companies.
It’s extra important to think through a holiday budget and how much relies on credit, she said. “People need to think about how much they can afford to repay and how long it will take to repay it.”
Holiday spending could be the same as 2021 for many people — but not everyone
Last month, third-quarter earnings from major banks like JPMorgan Chase & Co.
JPM,
-0.92%,
Wells Fargo
WFC,
-0.15%,
Citibank
C,
-1.45%
and Bank of America
BAC,
-0.30%
indicated consumer finances, on the whole, are not yet showing cracks under inflation’s strains. (Other numbers show the strain, like the personal savings rate that’s been dwindling.)
Now, two forecasts suggest many people ready to spend the same amount for this year’s holiday cheer as they did last year.
People are planning to spend an average $1,430 on gifts, travel and entertainment this year, which is around the $1,447 spent last year, according to PwC researchers. Three-quarters of people said they were planning to spend the same or more than last year and respondents said credit cards were one of their top ways to pay.
“ Compared to last year, credit card balances are getting bigger, more people are sitting on balances and debt costs are getting pricier.”
By another measure, Americans will pay an average $1,455 on holiday-related gifts and experiences, essentially flat from last year, say Deloitte researchers.
More than one-third of surveyed consumers say their financial outlook is worse than the same point last year. Nearly one-quarter of people were concerned about credit card debt as of late September, Deloitte’s numbers show in an ongoing tracking of consumer mood.
It’s understandable to see the concern with households amassing a collective $890 billion in credit card debt through the second quarter. Compared to last year, balances are getting bigger, more people are sitting on balances and debt costs are getting pricier because the interest rates applied to those balances are rising.
When people were carrying a credit card balance month to month, the sum was $5,474 on average, according to Raneri. That’s through the end of September and it’s a nearly 13% rise year over year, she said. The 164 million people carrying a balance is a 5% increase from last year, she noted.
Credit cards carrying a balance during the third quarter had an average 18.43% APR, Federal Reserve data shows. That’s up from 16.65% in the second quarter and up from 17.13% in 2021’s third quarter.
How the Fed influences credit card rates
Credit card issuers typically determine their rates by applying a “prime rate” — typically three percentage points on top of the federal funds rate — and the issuer’s profit margin, said Ted Rossman, senior industry analyst at Bankrate.com.
By late October, the rate on new card offers was 18.73%, according to Bankrate data. At this point last year, it was 16.31%, Rossman said. In a few weeks, the rates on new offers should beat the all-time record of an average 19% APR, exclusive to new offers, he added.
While it can take a billing cycle or two for a higher APR to make its way to an existing credit card account, Rossman noted the APRs on new offers could rise in a matter of days.
Here’s a hypothetical to show how much more expensive credit card debt becomes with every extra hike. Suppose the $5,474 balance is on a credit card with the current 18.73% average. If a person has to resort to minimum payments, Rossman said, they’d be paying $7,118 just in interest to pay off the debt.
“ In a few weeks, the rates on new credit card offers should beat the all-time record of an average 19% APR.”
What if the 18.73% APR gets kicked up 75 basis points to 19.48%? If that same borrower has to pay minimums, they are now paying $7,417 in interest to snuff the principal debt of $5,474, Rossman said.
The example has its limits because people may pay more than the minimum and they may incur more credit card debt as they pay off the old one. But it shows a bigger point: “Unfortunately, anybody dealing with credit card debt is a loser from the series of rate hikes. It was already expensive. It’s getting more so,” Rossman said.
When do rate hikes stop?
While decisions during the Fed’s November meeting can have a ripple effect on holiday-time borrowing costs, observers say the real question about Wednesday is the clues Federal Reserve Chairman Jerome Powell drops for what’s next. The central bank’s committee voting on interest rate increases reconvenes in mid-December.
On Wednesday, the Fed said in a statement it expected further rate increases, but also said it would be watching to see if there were lag effects with its tightening policies, which could slow or limit the total amount of increases.
“People, when they hear lags, they think about a pause. It’s very premature, in my view, to think about or be talking about pausing our rate hike. We have a ways to go,” Powell told reporters at a Wednesday afternoon press conference.
The economy is strong enough to handle higher rates, Powell said. For one thing, households have “strong balance sheets” and “strong spending power,” he noted.
Stock markets first jumped higher after the latest interest rate announcement. But they gave up the gains — and then some — by the end of the day. The Dow Jones Industrial Average
DJIA,
-1.55%
was down more than 500 points, or 1.6% while the S&P 500
SPX,
-2.50%
was down 2.5% and the Nasdaq Composite
COMP,
-3.36%
closed 3.4% lower.
Top economists in major North American-based banks forecasted the Fed will keep raising interest rates “until the first quarter of next year before potentially lowering rates through the end of 2023,” Sayee Srinivasan, chief economist at the American Bankers Association, the banking sector’s trade association, said ahead of Wednesday’s latest rate hike.
“Top economists polled as part of a banking industry panel expect Fed rate increases through at least the first quarter of 2023.”
The forecast, coming through an ABA advisory committee, is no sure thing. “Everything depends on the ability of the Fed to bring inflation down, so that will remain their clear priority,” said Srinivasan.
Meanwhile, rising costs may cause more people to put the holiday cheer on plastic, even their decorations. The majority of Christmas tree growers in one poll are expecting wholesale prices to climb 5% to 15% for this season.
