The Fed Just Raised Interest Rates Again. What It Means for People With Credit Card Debt

December 19, 2018, 10:50 PM UTC

The Federal Reserve raised interest rates by another quarter of a percentage point Wednesday, while signaling it could raise rates two more times in 2019, despite pressure from President Trump. Today’s increase marks the ninth time the Fed has raised rates in three years. And it’s all starting to add up for consumers with credit-card debt.

The Fed sets interest rates by adjusting the federal funds rate. That in turn influences the rates banks charge customers for loans. Even as rates have been rising this year, consumers are building up bigger balances on their credit cards. The Fed said that credit-card balances rose by $15 billion in the third quarter to $844 billion, the 17th straight quarter of rising debt.

Since then, consumers have more debt on their credit cards, even as the stock market tumbled. According to a survey by NerdWallet, credit-card balances have increased by 5% so far in 2018. The average outstanding balance for households with credit-card debt stood at around $6,929.

Now add to that growing pile of debt the trend of higher interest rates and you have U.S. households paying more for their credit-card loans. How much more? The website CompareCards calculated that the quarter-point increase alone will mean consumers are paying an additional $2.4 billion in interest payments.

Other types of consumer debt have also been rising: mortgages, student loans, and auto loans. And there are signs that the gradual but steady rise in rates are taking a toll on some consumers. Credit-card accounts that have been delinquent for more than 90 days have risen to 7.9% of all accounts with outstanding debt, up from 7% two years earlier. Auto loan delinquencies have been on a gradual rise for several years.

“Today’s rate hike means borrowing gets costlier, especially for credit-cards, home equity lines of credit, and borrowers with adjustable rate mortgages,” said Greg McBride, chief financial analyst at financial site Bankrate. “Consumers should aggressively pay down debt, refinance into fixed rates, and grab zero percent credit card offers to insulate against additional rate hikes and accelerate debt repayment.”

If there is a silver lining or two in today’s Fed news, it’s that people saving money in money-market accounts or CDs may receive a higher rate. And, while the Fed is still indicating it will raise rates in 2019, it’s now planning on two rates instead of three. But that may not be enough to remove the sting some consumers will feel when they open their credit-card bills in the coming months.

The Fed’s move also caused stocks to give up early losses and close with losses. The Dow Jones Industrial Average closed down 1.5% at 23,323.66.