: Rising interest rates and credit-card wielding consumers are a really bad combination as the holiday season approaches


It is three weeks before Black Friday, but the Federal Reserve has likely made the post-holiday debt hangover a little more intense.

The central bank made a widely expected move last week, adding another 75-basis-point increase to a key interest rate.

This rate hike will be reflected in credit-card rates in December 2022 or January 2023. In other words, pay off your post-holiday credit-card balance in full.

Every year, many people accumulate credit-card debt through the holiday season, pay it off in the early part of the following year — and then repeat the process.

Holiday sales could reach up to $960.4 billion, according to the National Retail Federation. That represents a 6% to 8% increase in sales on the previous year, which is inline with 2021, but slower than the 13.5% growth in 2020.

What’s different in the 2022 shopping season? Economists point to 40-year high inflation, coupled with rising interest rates. The Federal Reserve hopes its four-consecutive 75-basis-point interest rate hikes will ultimately cool inflation, without sending the economy into recession.

Wednesday’s rate hike takes the federal funds rate to the 3.75% to 4% range. To put that in context: It was near zero last year’s holiday season.

“It’s not the time to overspend and have a problem with paying your bills later. We know the economy is sending mixed messages,” said Michele Raneri, vice president of financial services research and consulting at TransUnion
one of the country’s three major credit-reporting companies.

It’s extra important to think through a holiday budget and how much relies on credit, she said. “People need to think about how much they can afford to repay and how long it will take to repay it.”

Holiday spending could be the same as 2021 for many people — but not everyone

Last month, third-quarter earnings from major banks like JPMorgan Chase & Co.
Wells Fargo

and Bank of America

indicated consumer finances, on the whole, are not yet showing cracks under inflation’s strains. (Other numbers, like the personal savings rate, are showing a strain.)

The National Retail Federation estimates that people are planning to spend just over $830 on gifts, decoration and food related to the holidays, inline with the average for the past 10 years. And yet Matthew Shay, the retail trade association’s president and CEO, said many are not shrinking away from purchases.

And yet Americans are planning to spend an average $1,430 on gifts, travel and entertainment this year, broadly inline with the $1,447 spent last year, according to PwC researchers. Three-quarters of people said they were planning to spend the same or more than last year and respondents said credit cards were one of their top ways to pay.

“ In a few weeks, the rates on new credit card offers should beat the all-time record of an average 19% APR.”

What if the 18.73% APR gets kicked up 75 basis points to 19.48%? If that same borrower has to pay minimums, they are now paying $7,417 in interest to snuff the principal debt of $5,474, Rossman said.

The example has its limits because people may pay more than the minimum and they may incur more credit card debt as they pay off the old one. But it shows a bigger point: “Unfortunately, anybody dealing with credit-card debt is a loser from the series of rate hikes. It was already expensive. It’s getting more so,” Rossman said.

When do rate hikes stop?

While decisions during the Fed’s November meeting can have a ripple effect on holiday-time borrowing costs, observers say the real question about Wednesday is the clues Federal Reserve Chairman Jerome Powell drops for what’s next. The central bank’s committee voting on interest rate increases reconvenes in mid-December.

On Wednesday, the Fed said in a statement it expected further rate increases, but also said it would be watching to see if there were lag effects with its tightening policies, which could slow or limit the total amount of increases.

“People, when they hear lags, they think about a pause. It’s very premature, in my view, to think about or be talking about pausing our rate hike. We have a ways to  go,” Powell told reporters at a Wednesday afternoon press conference.

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