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18Oct 2018

Rate hikes hit credit cards; hit them back – The Seattle Times


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While the stock market was taking investors’ collective breath away losing more than 5 percent over two days last week, consumers and investors missed seeing a move to record highs in a different market.

The 2018 Credit Card Fee Survey from CreditCards.com showed that average interest rates paid on credit cards had risen to 17 percent, a new all-time high since the site started tracking rates over a decade ago. As breathtaking as that number is, the truth in many households will be even worse.

So while investors were busy trying to figure out how to defend against the market and any potential recession or downturn, consumers should have been focused on what was happening directly in their wallets, where they now need to play some defense.

It’s not a surprise that credit-card rates are rising, not in the current interest-rate environment where the Federal Reserve has been making headlines by raising its benchmark rate eight times since 2015. Rate hikes always leach out from the central bank and the Fed funds rate to whatever consumers are paying for directly.

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But with the rate-hike cycle showing no signs of stopping, card rates reaching record highs means that the situation is going to get considerably worse from here.

Where consumers can’t do much about the stock market other than figure out how they want to ride out the bumps and rolls, they can take steps that will improve their net worth by digging in on their debt.

The average American has a credit-card balance of $6,375, according to Experian’s annual study of credit and debt; the average household with credit-card debt owes nearly $17,000. Total credit-card debt in America surpassed $1 trillion for the first time in 2017, and the average household is paying roughly $1,300 per year in credit-card interest, and that was calculated when rates were a few percentage points lower than they are today.

Throughout the long-running bull market and recovery from the financial crisis of 2008, economic satisfaction has been on the rise. As that has happened, consumers have become increasingly confident that they can handle their debt burdens, and have racked up the debt accordingly.

The time to pay the proverbial piper for those actions is upon us.

“[The average credit-card rate ] is up from about 16 percent last year and 15 percent two years ago, so this really does mirror the Fed, the broader trend we have seen in the economy,” said Ted Rossman, industry analyst for CreditCards.com, “so I wouldn’t be surprised if a year from now the average credit-card rate is north of 18 percent.”

17% average rate

In fact, Rossman could make the case that the 17 percent average rate is being generous to the card issuers and making things look better than they really are.

He explained in an interview that CreditCards.com surveys 100 popular card offers and calculates the average rate for all cards by using the lowest-possible rate from each program surveyed.

If CreditCards.com instead calculated its measure by using the highest number in the available range on those card programs, the overall average would stand at 24.44 percent.

Think of that big gap — if you are on the wrong end of it — as the cost of having a poor credit score.

The latest Fed hike hasn’t even worked through most card programs yet, since it typically takes one or two billing cycles to trickle down. When it does work its way through, Rossman noted that the entire range — the average low offer and the high range of those same offers for consumers with lesser credit — will be going up again.

“So 17 percent,” Rossman noted, “as high as it sounds, is about as good as it gets.”

General-purpose cards are charging close to 25 percent in some instances, and Rossman noted that a different CreditCards.com survey of some retailers found several stores — notably BrandSource, Big Lots and Zales — charging nearly 30 percent on their private-label cards.

That’s basically the penalty level limited by law on general-purpose cards, where a consumer can see their card rates hiked to 29.99 percent if they are 60 or more days late with payment.

“You don’t want to be paying these rates,” Rossman said. “Absolutely job number one for any credit-card holder is to pay those bills in full every month. If you can do that, then cards start to work for you rather than against you because you can get great perks … but if you can’t pay your bill in full, getting back 1 or 2 or even 5 percent in rewards is just going to pale in comparison to the interest you are paying.”

The point here isn’t just that card rates are high, but that when the market goes from feeling like a sure thing to feeling like it’s sure to nosedive, consumers who want to “do something” should look at their entire financial picture. The messages from the talking heads — mostly about staying the course and avoiding panic with your investments — are good ones, but savvy consumers can help themselves out and “do something” by making moves that will cut their costs no matter what the market does next.

That means paying off debt and/or reducing interest rates if possible, looking at better deals that might be available on everything from cellphone plans to utility bills, re-examining anything where the bill has been static for years and better deals and packages might now be available.

If the market this month has made it feel like your portfolio is under attack, know that a slowing economy, rising rates and inflation will make it feel like all of your finances are being assailed, so take the steps now to save money later.

It may not make you feel any better about the prospects of the market, but it will make you feel better about your finances.

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