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Interest Rates Increases Raise Monthly PaymentsConsumers in the U.S. increased their revolving credit debt load during 2004. Most of the increase was due to increased credit card debt. At the beginning of 2004 total revolving debt was $758 billion; by the end of 2004 consumers had increased that amount to $796 billion, an increase of $38 billion in one year. For years more consumers in this country have added to credit card debt and lending institutions demanding that the U.S. Congress take action to force consumers to make a greater effort to pay-down credit card balances. A more sincere effort to repay is one of the major reasons Congress is currently trying to pass more restrictive personal bankruptcy laws. The main thrust of the bill now making its way through the Congress is to make it more difficult for consumers to avoid paying credit card debts by filing for personal bankruptcy under Chapter 7. If the new legislation passes Congress and is enacted into law, a consumer will have to pass a “means test” to be eligible to file Chapter 7. Part of that test will be the need to demonstrate that their personal income is below the median level for the state they live in. The added risk to creditors issuing credit cards from the accumulating consumer credit card debt is forcing them to increase the APR or annual percentage rate of charged interest on credit cards. There is a direct relationship between the risk to lenders issuing credit cards and the APR they charge. According to Bankrate.com since last June the average rate has risen from 10.76 percent APR to 12.87 percent.
What’s Ahead With “the Fed?”There is little prospect interest rates or APR will decrease in the near future, it is much more likely that they will increase. Fees for late payments and for over-the-limit balances will also increase. The primary reason that the outlook for the near future is for increasing interest rates is the recent and future action of “the Fed,” (the Federal Reserve) the central bank of the United States. The job of “the Fed” is to influence money supply and credit conditions in the economy in order to achieve our National goals. Those goals include stable prices, high employment and maximum stable growth of the U.S. economy. The primary tool “the Fed” uses to do its job is to set the federal funds rate - the interest rate that banks must pay to borrow money, short term, from one another or from the Federal Reserve which is the lender of last resort. What that means is banks must expend every effort to borrow from one another before they can turn to the Federal Reserve.
Recent Actions of the “the Fed”Beginning in early 2001 “the Fed” began to lower the federal funds rate in order to increase money supply and stimulate economic growth and higher employment. Starting at a rate of 6 percent “the Fed” systematically reduced rates by a quarter or half percent during 2001, 2002 and 2003 to a level of 1 percent where is stayed for all of 2004. These nearly four full years were a time of very low interest rates in the U.S. with many rates, such as home mortgage rates hitting all-time lows. Credit card interest rates followed the general trend. Since the end of 2004 “the Fed” has become concerned that while economic growth showed steady improvement and employment gains were positive, prices were not remaining stable and some concerns of inflationary increases seemed valid. The response of “the Fed” was to begin to increase the federal funds rate a quarter percent at a t time and that rate has now reached 2.75 percent. Those who specialize in studying “the Fed” and predicting their likely future changes seem unanimous in the notion that the most likely scenario for the near future are further increases in “the Fed” rate. For some consumers the interest rate charged them is based directly on the federal funds rate plus a mark up. For instance, I have a line of credit from my bank. The interest that I must pay for the use of that credit line is the federal funds rate plus 2 percent. Other consumer loans and credit card rates may not be calculated from a base of the federal funds rate but all of them are influenced by that rate. From all indications at present, consumers with credit card balances can expect increases in their APR rates in future months. Taken together with other rate increases and penalties those monthly payments are bound to be higher!
B.R. Poulton, Ph.D. |
