Rising interest rates spell fatter returns on credit cards for banks this year — but not for customers trying to save for a rainy day.
Americans have entered 2017 groaning under $992.4 billion in credit card debt. Following the Federal Reserve’s December interest rate hike of 0.25 percent — and with up to three more similar rate increases expected this year — the cost of that debt is spiking.
That’s great news for banks and credit card issuers, whose stock prices have rallied. For consumers, however, it’s bad in two ways: higher interest rates on credit card debt, but no gains in savings yields.
One reason for the imbalance is that most credit card deals are structured to allow banks to pass along any rate hikes to card holders, but the banks in turn aren’t wooing depositors with higher interest rates.
“Banks are protected in terms of … profit margins when their cost of funds goes up,” said Ben Woolsey, president of CreditCardForum. “Unfortunately, on the savings side, the cost of funds don’t equate with the deposit relationships.”
Recent changes to credit card and savings account rates illustrate this divide. In the second half of 2016, the average annual percentage rate for new credit card offers jumped from 17.85 percent to 18.16 percent, while the annual percentage yield for savings and checking accounts barely inched up from 0.32 percent to 0.33 percent, said WalletHub.
Because the existing debt base is so large, even small interest rate increases ring up big dollars for banks. Based on the US credit card debt load and average rate for cards that carry a balance, a 0.25 percent rate hike by the Fed hits American borrowers with $2.48 billion in additional annual interest. For a borrower with the average credit-card balance of $5,550, a 1 percentage point rate hike, from 13.61 percent to 14.61 percent, would add about $63 in interest the first year.
Experts recommend consumers respond to rising rates by shopping around for lower interest rate cards, and aiming to repay at least part of your debt this year. After all, rising rates don’t pinch borrowers who don’t carry a balance.
“It’s just reason No. 10,000 to focus on paying down your credit card debt,” says Matt Schulz, senior industry analyst at creditcards.com.