After years of cheap money, it is suddenly much more expensive to borrow.
The Federal Reserve has raised its benchmark short-term rate by 3 percentage points since March in a bid to rein in relentless inflation, including another sharp hike earlier this week.
“Interest rates are rising at the fastest rate any of us have seen in our adult lives,” said Greg McBride, chief financial analyst at Bankrate.com. “Credit card rates are the highest since 1995, mortgage rates are the highest since 2008, and auto loan rates are the highest since 2012.”
But it was the combination of higher rates and inflation that hit consumers particularly hard, he added. The consumer price index rose 8.3% in August from a year earlier.
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Rising prices are prompting more people to rely on credit just as “interest rates are rising at the fastest rate in decades – it’s just a dangerous mix,” McBride said.
“With more rate hikes to come, this will put additional pressure on the budgets of households with variable rate debt, such as home equity lines of credit and credit cards,” he said.
Here’s how the Fed’s hikes this year have impacted the rates consumers pay on the most common types of debt, according to recent figures from Bankrate.
Credit cards: up 182 basis points
- September average: 18.16%
- March average: 16.34%
Credit card rates are now over 18% and will likely hit 20% by early next year, while balances are higher and nearly half of credit card holders are now carrying debt of credit card from month to month, depending on a Discount rate report.
With the rate hikes so far, these credit card users will end up paying about $20.9 billion more in 2022 than they otherwise would have, according to a separate analysis by WalletHub.
HELOCs: up 279 basis points
- September average: 6.75%
- March average: 3.96%
On a $50,000 net worth line, interest alone is $125 more per month than it was at the start of the year. “Just like credit cards, it takes time,” McBride said.
Mortgages: up 221 basis points
- September average: 6.35%
- March average: 4.14%
Withaya Prasongsin | time | Getty Images
This month, the average interest rate on the 30-year fixed rate mortgage rate topped 6% for the first time since the Great Recession and is now more than double what it was a year ago.
As a result, homebuyers will pay about $30,600 more in interest if they take out a mortgage, assuming a 30-year fixed rate on an average home loan of $409,100, according to WalletHub analysis.
Car credits: +104 basis points
- September average: 5.02%
- March average: 3.98%
Paying an annual percentage rate of 6% instead of 3% could cost consumers almost $4,000 more in interest over the term of a $40,000 auto loan over 72 months, according to data from Edmunds.
However, in this case, “rising rates are not the reason the average car payment is over $800 a month,” McBride said. “It’s the sticker price which is much higher.”
- September average: 10.73%
- March average: 10.30%
Jayk7 | time | Getty Images
Even personal loan rates are higher as the number of people with this type of debt hit a new high in the second quarter, according to TransUnion’s latest report. credit industry report.
“Those with good credit can still get single-digit rates,” McBride said. But anyone with weaker credit will now see “significantly higher rates.”
“If consumers haven’t already assessed their budget after feeling the impact of inflation, they should start it now,” said Michele Raneri, vice president of US research and consulting at TransUnion. .
Amid fears of a recession and further rate hikes to come, consumers should “reduce discretionary spending” where they can, advised Tomas Philipson, a University of Chicago economist and former chairman of the Council of White House economic advisers.
“You’re going to need your money for necessities, which is food, gas, and lodging.”
Cutting costs will also help avoid additional credit card debt and pave the way for increased savings, experts said.
“Have an emergency fund handy,” Raneri warned. “Three to six months of expenses ideally, but even a few hundred extra dollars can prove invaluable if unforeseen circumstances arise.”
“You have to be careful here,” added Philipson. Without sufficient cash reserves, “you are vulnerable”.