The Federal Reserve hiked its benchmark rate by 0.75 percentage points on Wednesday in an effort to temper the rising costs of consumer goods and services.
While economists say raising the interest rate will help cool consumer demand and hopefully ease record-high inflation, it will also raise the cost of borrowing for everything from houses to car loans. Lower-income households with credit card-debt — those with a median income of $16,290 per year and $35,630 per year — typically have a higher debt-to-income ratio than wealthier Americans, according to Federal Reserve data.
The Fed’s four rate hikes this year could hurt low-income families more than most, said Radha Seshagiri, the public policy and system change director at SaverLife, a nonprofit that helps families with low and moderate incomes to save money. They are already struggling to pay back credit-card loans and purchase big-ticket items like automobiles due to the rising costs, she said.
“The delinquency rate for credit-card debt was 1.73% in the first quarter of 2022, up from 1.48% in the first quarter of 2021.”
At the same time, the delinquency rate for credit-card debt was 1.73% in the first quarter of 2022, up from a recent low of 1.48% in the first quarter of 2021, according to the Federal Reserve.
With the cost of borrowing increasing, lower-income Americans and their credit scores could be more vulnerable, Seshagiri said.
“As they are putting their expenses onto those credit cards and we see an increase in interest rates, credit-card balances will increase,” he said. “So now this is a heavier load for these folks to carry with those interest-rate hikes.”
She said that would hurt those who already struggle to pay their monthly minimum payment. It could potentially lead to more defaults, thereby hurting their credit scores, she said.
“It ultimately will limit these folks from eventually buying a home …all of those things that help people invest in their families or go to work,” Seshagiri added.
Lower-income Americans potentially face more difficulty buying second-hand automobiles, she said. Early in the pandemic, a chip shortage forced many car manufacturers to cease production and the inventory shortage pushed up the price of new cars. Consumers turned to used cars, which pushed up those prices.
The average used car listing price increased to $33,341 in June, up 0.5% from the previous month and $172 below the peak price in March, according to a recent report by car shopping app CoPilot. The current listing price for used automobiles is one of the highest levels of all time.
Peters noted that people in rural areas are seeing faster gains in the cost of used cars and trucks than those living in cities, partly because people living in cities tend to have more public transportation options.