Rising interest rates and consumers holding credit cards make for a very bad combination as the holiday season approaches

By Andrew Keshner

Consumers plan to spend an average of about $1,400 this holiday season, according to two forecasts

There are three weeks until Black Friday, but the Federal Reserve has likely made the post-holiday debt hangover a bit more intense.

The central bank took a widely expected move last week, adding another 75 basis point hike to a key interest rate

This rate hike will affect credit card rates in December 2022 or January 2023. In other words, pay off your credit card balance in full after the holidays.

Every year, many people rack up credit card debt over the holiday season, pay it off early the next year, and then repeat the process.

Holiday sales could reach up to $960.4 billion, according to the National Retail Federation. This represents an increase in sales of 6% to 8% over the previous year, which is in line with 2021, but slower than the 13.5% growth in 2020.

What’s different about the 2022 shopping season? Economists point to high inflation for 40 years, associated with rising interest rates. The Federal Reserve hopes that its four consecutive 75 basis point interest rate hikes will eventually calm inflation, without sending the economy into recession

Wednesday’s rate hike brings the fed funds rate into the 3.75% to 4% range. To put that into context: it was close to zero during the holiday season last year.

“Now is not the time to overspend and have a problem paying your bills later. We know the economy is sending mixed messages,” said Michele Raneri, vice president of research and consulting. in financial services at TransUnion (TRU), one of three in the country. major credit reporting companies.

It’s very important to think about a vacation budget and how much depends on credit, she said. “People need to think about how much they can afford to pay back and how long it will take them to pay it back.”

Vacation 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), Wells Fargo (WFC), Citibank (C) and Bank of America (BAC) indicated that consumer finances, in the together are not yet showing any cracks under the pressures of inflation. (Other numbers, like the personal savings rate, show strain.)

The National Retail Federation estimates that people plan to spend just over $830 on holiday-related gifts, decor and food, which is the average for the past 10 years. And yet, Matthew Shay, president and chief executive of the retail association, said many aren’t backing down from the purchases.

And yet, Americans plan to spend an average of $1,430 on gifts, travel and entertainment this year, roughly matching the $1,447 spent last year, according to PwC researchers. Three-quarters of people said they planned to spend the same or more than a year ago and respondents said credit cards were one of their main means of payment.

By another measure, Americans will pay an average of $1,455 in holiday-related gifts and experiences, essentially unchanged from last year, Deloitte researchers found.

The bad news: More than a third of consumers surveyed say their financial outlook is worse than at this time last year. Nearly a quarter of people were concerned about credit card debt at the end of September, Deloitte said.

Households racked up $890 billion in credit card debt in the second quarter, slightly less than the record $930 billion in the fourth quarter of 2019.

Those with a monthly credit card balance through the end of September had an average balance of $5,474, Raneri said. That’s a nearly 13% year-over-year increase, she said. The number of people carrying a credit card balance increased by 5% to 164 million.

Americans who carried a credit card balance during the third quarter had an average APR of 18.43%, according to figures from the Federal Reserve. This is up from 16.65% in the previous quarter and 17.13% in the third quarter of 2021.

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 markup, said Ted Rossman, senior industry analyst at Bankrate.com.

At the end of October, the rate on new card offers was 18.73%, according to data from Bankrate. It was 16.31% this time last year, Rossman said. In a few weeks, rates on new offers should break the all-time high of an average APR of 19%, exclusive to new offers, he added.

While it may take a billing cycle or two for a higher APR to flow to an existing credit card account, Rossman noted that APRs on new offers could increase within days.

Here is a hypothesis to show how much more expensive credit card debt becomes with each additional increase. Suppose the balance of $5,474 is on a credit card with the current average of 18.73%. If someone has to resort to minimum payments, Rossman said, they would pay $7,118 in interest alone to pay off the debt.

What if the APR of 18.73% increases by 75 basis points to 19.48%? If that same borrower has to pay minimums, they’re now paying $7,417 in interest to choke off the principal debt of $5,474, Rossman said.

The example has its limitations because people can pay more than the minimum and they can incur more credit card debt when they pay off the old one. But it shows a bigger point: “Unfortunately, anyone dealing with credit card debt is a loser in the series of rate hikes. It was already expensive. It’s getting more expensive,” he said. said Rossman.

When do rate hikes stop?

While decisions made at the Fed’s November meeting may have a ripple effect on borrowing costs over the holidays, observers say the real issue about Wednesday is the clues that the chairman of the Federal Reserve, Jerome Powell, drops for the future. The central bank committee voting on interest rate hikes meets again in mid-December.

The Fed said in a statement on Wednesday that it expected further rate hikes, but also said it would monitor whether there were any lag effects with its tightening policies, which could slow or limit the total amount of increases.

“People, when they hear lags, they think of pausing. It’s very premature, in my view, to think or talk about pausing our rate hike. We’ve got a ways to go,” Powell told reporters. at a press conference on Wednesday afternoon. conference.

The economy is strong enough to support higher rates, Powell said. On the one hand, households have “strong balance sheets” and “strong purchasing power”, he noted.

Stock markets initially jumped after the latest interest rate announcement. But they gave up the winnings – and more – at the end of the day. The Dow Jones Industrial Average fell more than 500 points, or 1.6%, while the S&P 500 fell 2.5% and the Nasdaq Composite closed down 3.4%.

On Thursday, the indices were trying to break a three-day losing streak, but were still trading lower towards the end of the session.

In September, top economists at major North American banks predicted the Fed would continue to raise interest rates “through the first quarter of next year before potentially cutting rates through the end of 2023,” said Sayee Srinivasan, chief economist at the American Bankers Association. the banking industry trade association, said ahead of Wednesday’s latest rate hike.

Predictions, coming from an advisory board of the ABA, are not sure. “It all depends on the Fed’s ability to bring inflation down, so that will clearly remain its priority,” Srinivasan said.

Meanwhile, rising costs may cause more people to put holiday cheer on plastic, even decorations. The majority of Christmas tree growers in a survey expect wholesale prices to rise 5-15% for this season.

-Andrew Keshner

 

(END) Dow Jones Newswire

11-07-22 2033ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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