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March 30, 2019

What Fed Rate Changes Mean for Those in Debt

According to the New York Times, the Federal Reserve increased the benchmark interest rate for the fourth time of 2018 on December 19. The benchmark interest rate is the rate that the Fed charges the banks to borrow from them. This higher interest rate trickles down to loan customers of all kinds. Of course, higher interest rates translate into higher payments each month.

Increased interest rate will likely be passed along to credit card holders who carry debt on their cards, people who need auto loans, and those who have home equity loans or other adjustable lines of credit. When people have to pay more to borrow, they often need to take more time to pay off their debt and pay more in interest charges.

This is the ninth time that the Fed has increased the benchmark interest rate since 2015. According to MarketWatch, the interest rate increase is customarily passed along to consumers approximately within two billing cycles. Also, credit card companies are not required to inform customers when their interest rate increases due to an action by the Fed.

Credit Card

The Federal Reserve estimated that there are about $1 trillion that consumers have amassed in credit card debt. It is estimated that the increased interest rates projected to be passed along to credit card debt holders will force them to pay $2.4 billion more in interest fees.

According to Fortune Magazine, consumers have been building up more credit card debt for 17 straight quarters, as of late 2018. NerdWallet is reporting that the average credit card debt holder is carrying almost $7,000 of unpaid credit card debt from month to month. NerdWallet also found that such households paid an average of $1,141 each year in interest fees alone.

Credit card debt carries very high interest and is very difficult to pay off. The Federal Reserve Bank of St. Louis found the average interest rate charged by credit card companies is around 16.46 percent. With such high borrowing rates for some families, credit card debt becomes a way of life, with higher and higher interest and principal payments, due to higher interest rates. Not surprisingly, with such high-interest rates and large amounts of borrowing, Fortune Magazine found almost 8 percent of all credit card debt holders were 90 or more days behind in their credit card payments.

Home Borrowing

According to CNBC, the Fed’s willingness to increase interest rates has caused the average, 30-year, fixed-rate mortgage to increase to around 4.83 percent. Also, housing prices have risen, so it is about 10 percent more expensive to buy a home than it was a bit over a year ago.

The home borrowers with the most to lose with the Fed action, though, are the ones who have home equity lines of credit and adjustable-rate mortgages. Both the HELOCs and the ARMs go up within two billing cycles of the Fed raising interest rates.

Car Loans

The car loan sector is not being hit as hard from borrowing costs as they are from the rising cost of cars. According to CNBC, the average cost for a borrower who takes out an auto loan of $25,000 is only $3 more per month with the quarter-point interest rate increase. The average five-year rate for a new car loan is 4.93 percent, with the average four-year used car loan going for 5.72 percent. The higher prices for vehicles and higher interest rates combined with the strong predilection of many US car buyers in the past several years for SUVs and large trucks are adding to longer payment periods and much higher overall interest being paid for these vehicles over time.

Student Loans

Many families are also struggling under high amounts of student loan debt. The Federal Student Loan Portfolio stated the average student loan debt is $43,538. The good news about federally subsidized loans is that those debts have a fixed rate of repayment. The bad news is that some students have private student loan debt. This type of debt usually carries variable-rate interest loans in which the rate will increase with an increase in the Fed benchmark rate.

Sadly, many families are juggling a variety of these types of consumer loans.

Other Cost of Living Increases

Overall, many households have not seen a rise in wages. Significantly, the wages of lower wage earners are not rising much. NerdWallet is reporting that there are also costs that have been rising along with borrowing costs. For example, the cost of medical care has risen 33 percent since 2008, while the cost of dining out has increased 27 percent in that same period.

These higher costs coupled with higher borrowing costs may begin to place stress on households that are already struggling to stay afloat. There are indeed signs that this is true in the economy already. For example, the Huffington Post reported that seven million people are already three months behind in their auto loan payments. When people are three months behind in their auto loan payments, the repossession process begins. Considering how many households in the United States are dependent upon their vehicles to get them to and from work, this statistic shows how stretched many families are financially and are struggling to survive.


One solution by NerdWallet was for families who are struggling with high debt costs to lower larger expenses, such as taking on a roommate to shoulder more of the cost of rent or mortgage. They also suggested that families eat at home more to save more money, since dining out has become so pricey.

CNBC suggested that borrowers try to convert their adjustable-rate mortgage into one that is at a fixed rate before the lender has raised the rate. CNBC suggested that those with HELOCs either refinance into a fixed-rate home equity loan or ask the lender to freeze their interest rate at the current balance of the loan. Asking for a rate freeze does limit the amount of money in the line of credit that can be borrowed in the future.

CNBC also suggested consumers buy only as much vehicle as they really need and to consider buying a pre-owned vehicle to avoid depreciation costs.

NerdWallet suggested that students do not go on student loan forbearance if they find that they are having trouble managing to pay back federal student loan debt. A forbearance period allows the loans to accrue interest at a higher rate than the subsidized rate for the entire period of forbearance. For example, in the case of the average federally-subsidized student loan of around $43,000, a year-long forbearance period can add over $2,199 to the loan amount. Other programs to pay back the loan include a temporary deferment and a payment based upon the person’s actual wages. The latter plan has options for total forgiveness of the rest of the loan after 20 to 25 years of payments.

A fixed loan rate will help families stave off further rate hikes by the Fed and will help wean them off of costly credit card debt. This helps families have more money available in their budgets so they can avoid losing their homes or autos, which are devastating losses for most Americans.

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