After years of cheap money, it is suddenly much more expensive to borrow.
The Federal Reserve System it has raised its benchmark short-term rate by 3 percentage points since March in an effort to curb it unrelenting inflationcounting on it another big hike earlier this week.
“Interest rates are rising at the fastest pace any of us have seen growing up,” 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’s the combination of higher rates and inflation that has hit consumers particularly hard, he added. The consumer price index rose 8.3% in August compared to the previous year.
Higher prices are causing more people to lean on credit at a time when “interest rates are rising at the fastest rate in decades — that’s just a dangerous combination,” McBride said.
“With further rate hikes, this will put further 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 this year’s Fed hikes have affected the rates consumers pay for the most common types of debt, according to recent data from Bankrate.
- Average for September: 18.16%
- March average: 16.34%
Credit card rates are now over 18% and are likely to reach 20% by early next year, while the balances are higher and nearly half of credit card holders now have month-to-month credit card debt, according to a Bank account report.
With rate increases to date, those credit card users will pay $20.9 billion more in 2022 than they otherwise would have, according to a separate analysis by the company WalletHub.
- Average for September: 6.75%
- March average: 3.96%
Home equity lines of credit they are also on the rise because, like credit cards, they are directly affected by the Fed’s benchmark.
On a $50,000 home equity line, interest alone costs an additional $125 per month over the beginning of the year. “Like credit cards, it takes a bite,” McBride said.
- Average for September: 6.35%
- March average: 4.14%
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This month, the average interest rate is on a 30-year fixed rate mortgage it exceeded 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 the average home loan of $409,100, according to WalletHub analysis.
- Average for September: 5.02%
- March average: 3.98%
Paying a 6% APR instead of 3% could cost consumers nearly $4,000 more in interest over the course of a $40,000 72-month car loan, according to Edmunds data.
But in this case, “rising rates are not why the average car payment is over $800 a month,” McBride said. “It is sticker price that’s much higher.”
- Average for September: 10.73%
- March average: 10.30%
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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 the latest TransUnion report credit industry statistics report.
“Those with good credit are still able to get rates in the single digits,” McBride said. But anyone with weaker credit will now see “significantly higher rates.”
“If consumers haven’t already reviewed their budgets after feeling the impact of inflation, they should start now,” said Michele Raneri, vice president of U.S. research and consulting at TransUnion.
Amid fears of a recession and more rate hikes, consumers should “reduce discretionary spending” where they can, advised Tomas Philipson, a University of Chicago economist and former chairman of the White House Council of Economic Advisers.
“You will need your money for essentials, so food, gas and shelter.
Cutting costs will also help avoid additional credit card debt and pave the way for increased savings, experts said.
“Get your emergency fund ready,” Raneri warned. “Ideally three to six months’ worth of costs, but even a few hundred dollars extra can prove valuable if unforeseen circumstances arise.”
“You have to be careful here,” Philipson added. Without sufficient cash reserves, “you are vulnerable.”