Record credit card debt as interest rates increase

Here we go again. It is expected that Americans will have a record amount of credit card debt at the end of the first quarter of 2017. This is arguably the worst possible time to be in any type short term, revolving unsecured debt as the federal reserve is expected to continue to increase short term interest rates multiple times throughout the year, which will directly impact consumer interest rates as well as costs.

So when was the last time that Americans were in this much debt? How about in 2007, right before the “great recession” and housing crash. While there are no guarantees that history will repeat itself, what can’t be argued is that it is never a good time to be in (or take on) credit card debt when short term interest rates are increasing.

Nerdwallet reports that the any household that has a balance on their account now owes just over $16,000 to their credit card company. That is a lot of money, especially when considering it can be ~33% of median household income. To make matters worse, if the Federal Reserve raised interest rates by 1% this year (which may be possible), then those families would more than likely owe an additional $160 in annual interest payments. This is bound to cause more families to apply to a credit card debt hardship program.

This is basic economics as almost every single bank and credit card company sets its monthly interest rates using the federal reserve prime rate as a starting point. While there may be exceptions from time to time, that is the general rule. So the higher that rates go, the higher will be a household’s monthly payment.

While there are no guarantees that the Fed will increase rates in 2017 (as this was expected to happen in 2016 but there was only one small increase), the point being is that when an economic cycle is close to or may be peaking, that is not a time to run up excessive spending. Now is the time to save, when the economy as well as job market is strong. As there are natural cycles to things, and whether it is next quarter or 2 years down the road things will change…maybe even recession will start, which is already long overdue.

In addition to there being a record amount of household credit card debt (which is approaching one trillion dollars per Wallet Hub), total household debt is up about 30% since 2002. Americans now owe about $133,0000 on mortgages, car or student loans, credit card, etc. according to NerdWallet. So households have more financial obligations that at any other point since the last decade.

Not only will the federal reserve be raising short term rates (which will directly impact credit card debt and other short term loan products), but mortgage rates are also trending up. This is both due to an increasing chance of inflation as well as the increase to short term rates is helping to pull up long term rates. So it looks like that consumers will be paying more of their hard earned income throughout 2017 to serve their various debts.

The millions of households that are taking on an increase amount of debt are doing exactly what they should not be doing! When the economy is strong, and job security is relatively high, this is when people should be getting their finances in order. It will help them avoid a future hardship.

But alas….that is not the American way! Instead households spend, and when the economic cycle changes to a slowdown or recession, they scramble to pay off their bills and complain about the “Wall Street Banks”. Oh well…this is the American way…for better or for worse.

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