Average users who have a credit life are the ones who are being affected the most by the high rises in interest rates that have been taking place in the United States for a year. The situation is such that some households could be on the verge of bankruptcy.
In the last 12 months, the United States Federal Reserve (FED) has raised interest rates nine times in a row, placing them in a range between 4.75% and 5% and reaching the highest ceiling seen since September 2007. The objective of the president of the FED, Jerome Powell, with this strategy is to contain inflation as soon as possible to return it to 2%.
The road is not easy and to reach that figure, you first have to cross a path in which the borrowed money, with which many American households live, is going to be increasingly expensive.
How does the increase in interest rates affect consumers?
Saving Americans have begun to benefit from this situation, but debtors are seeing how the money they have borrowed is more expensive. Above all, those who pay their daily expenses, small and large, with a credit card, a very common and necessary practice in the United States. This modality allows citizens to build a credit history, essential to increase the credit line of the cards, request a mortgage or a loan to buy a car, a house, etc.
In addition, as economic analyst Jill González explains to France 24, “credit cards offer several different benefits, such as zero-dollar fraud liability, and they are a more convenient and easy-to-use means of payment.”
Credit cards now account for the bulk of defaulted home loans Americans have. As their interests are closely linked to the decisions of the Fed, consumers are closely following the movements of the US Central Bank.. Its members anticipate that at the end of 2023 the rates will stand at 5.125%, in a range of 5% to 5.25%, to then drop 0.75 points in 2024 and 1.25 less in 2025.
What is the debt of Americans and where does it come from?
For those who apply for a new credit card right now, the average interest rate is 21.92%, while for the existing ones the interest rates are slightly higher than 19%, nothing to do with the 16% that was registered exactly one year ago. when the Fed began its journey of raising interest rates.
“In fact, WalletHub has estimated that due to the increases that occurred between March 2022 and February 2023, credit card users will end up paying extra $30.4 billion more for interest over the next 12 months, which they otherwise would not have had,” WalletHub analyst Jill González told France 24.
To understand the importance of these figures, it is essential to know that in 2021, 84% of Americans had at least one credit card and 75% already enjoyed it at age 25, which makes this method the first credit experience. for the majority of young people in this country.
In addition, a Forbes report suggests that each person has an average of three different credit cards, with a median spending of $9,990 per household. “That’s $2,015 below WalletHub’s projected bankruptcy point for household finances, which is $12,005,” adds analyst González.
As if that were not enough, by the end of 2022, Americans accumulated a historical debt record of $986 billion on their credit cards, surpassing the pre-pandemic maximum of $927 billion, according to the Federal Reserve Bank of New York.
Inflation and the ghosts of a possible economic recession are behind the fact that many have returned to the habits of living in debt and now there is no turning back. Households are, Jill González insists to France 24, “on the verge of bankruptcy”, taking as a reference “the level of credit card indebtedness that existed at the end of 2007, when the crisis began and the economy collapsed. The figures are adjusted for inflation.
Who are the most affected?
The greater indebtedness mainly affects households that earn less than 100,000 dollars a year. Of them, 4 out of 10 say that their debt has increased, which is causing delays in payments.
This has its explanation, according to what Annamaría Lusardi, University Professor of Economics and Accounting at The George Washington University, told France 24, that low-income families generally “have little financial education, and tend to use credit cards more expensive.” Lusardi adds that research she conducted with her team “in the past has indicated that many use them in expensive ways, for example, paying only the minimum, going over the limit, making late payments, and using the cards for cash advances.” ”.
Also, we must not forget that, in the US, with a population of 396 million, 43 million of them live a large part of their lives paying off student debt that amounts to $1.6 billion nationally. The advice that experts like Professor Lusardi recommend to France 24 readers is “simple: pay your credit card on time and pay it off in full”.
