The Federal Reserve raised its key rate by 0.75 percentage points on Wednesday in a bid to temper rising costs for consumer goods and services.
While economists say the interest rate hike will help cool consumer demand and hopefully dampen record inflation, it will also increase the cost of borrowing for everything from homes to car loans. Low-income households with credit card debt—those with a median income of $16,290 per year and $35,630 per year—generally 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, director of public policy and system change at SaverLife, a nonprofit that helps families low and middle income to save money. They are already struggling to pay off credit card loans and buy big-ticket items like automobiles due to rising costs, she said.
““People are starting to put their basic needs and daily expenses on their credit cards.””
Seshagiri said most of the people his group serves are hourly earners – who earn their living from the number of hours worked in a given week – and need a car for their daily commute, either because whether they live in rural areas where public transport is not available or because they work nights. They have, she added, been hit hard by rising food and fuel prices.
“People are starting to put their basic needs and daily expenses on their credit cards,” Seshagiri said.
Inflation hit a 41-year high in June, with prices for consumer goods and services rising 9.1% from a year earlier. The price of groceries last month jumped 12.2% on the year, and gasoline rose by over $1 from this time last year to $4.25 Thursday.
However, the recent rise in the cost of living has had an even greater impact on rural America, according to a report by Professor Dave Peters of Iowa State University, who studied the impact of inflation in small towns. “The biggest inflationary impact on rural households has been the increased cost of transport, which is essential in rural areas where residents have to travel longer distances to get to work, school or shopping. groceries for their daily needs.” Peters wrote.
Rural people pay $2,470 more a year for gasoline and diesel than two years ago, while urban dwellers pay $2,057 more, according to the report.
Savings are running out
Americans were already dipping into their savings to cover rising costs. The personal savings rate – the percentage of disposable income that people save – fell to 5.4% in May from 10.4% in May 2021, hitting one of the lowest levels in decades, according to the Bureau of Economic Analysis.
“At some point, these savings will run out,” Seshagiri added.
Some 40% of Americans said they already rely on their credit cards more because of inflation, according to a recent Forbes Advisor poll.
“Excessively high inflation tends to undermine the purchasing power of consumers, especially if their wages or other sources of income have not increased,” according to a report by Michael Fisher, an analyst at financial site TradingPedia. “Therefore, to meet the rising cost of living, consumers may need to borrow.”
“The credit card debt delinquency rate was 1.73% in the first quarter of 2022, compared to 1.48% in the first quarter of 2021.”
Meanwhile, the credit card debt default rate 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 rising cost of borrowing, lower-income Americans and their credit scores could be more vulnerable, Seshagiri said.
“As they put their spending on these credit cards and we see interest rates go up, credit card balances will go up,” he said. “So now it’s a bigger burden for these people to bear with these interest rate hikes.”
She said it would hurt those who are already struggling to pay their minimum monthly payment. This could potentially lead to more defaults, hurting their credit ratings, she said.
“It will ultimately stop these people from buying a house…all of those things that help people invest in their families or go to work,” Seshagiri added.
Lower-income Americans potentially have a harder time buying used cars, she said. At the start of the pandemic, a shortage of chips forced many automakers to cease production, and shortages of inventory drove up the price of new cars. Consumers have turned to used cars, which has driven up these prices.
The average used car listing price rose to $33,341 in June, up 0.5% from the previous month and $172 lower than March’s record price, according to a recent report by the CoPilot car buying app. The current listing price for used automobiles is one of the highest ever.
Peters noted that rural dwellers are seeing faster increases in the cost of used cars and trucks than those who live in cities, in part because city dwellers tend to have more transportation options. in common.