You know Your Survival Guy has been happy to see higher rates that retirees and savers could sink their teeth into. But what about borrowers? Interest paid on non-mortgage borrowing has surged as high rates have made purchases of cars, homes, and anything on a credit card more expensive. Gina Heeb and Kailyn Rhone report in The Wall Street Journal:
The American economy has held up well against higher inflation and interest rates. Many individual borrowers haven’t.
Predictions for a recession this year have largely faded. Employers have added jobs at a healthy clip month after month. Households have continued to spend. Many locked in ultralow mortgage rates before the Federal Reserve began its campaign to curb inflation in 2022.
But Americans who need to borrow now stand on shakier ground. The costs to borrow for a home, a car or on a credit card are at the highest levels in decades, after the Fed raised rates nearly a dozen times in the past two years. The total amount of interest consumers paid on mortgages in 2023 rose 14% from a year earlier, according to Bureau of Economic Analysis data. It jumped 50% for other types of consumer debt, such as credit cards and auto loans.
This is in many ways the desired effect, since higher rates are meant to cool the economy. The central bank has penciled in just one rate cut this year, though more investors are betting on multiple cuts after promising inflation data.
Inflation has eased significantly since the pandemic, but years of faster-than-usual price increases have added up. Many households have spent down the glut of cash they saved in the pandemic. The top 10% of households by income, or those earning $245,000 or more a year, hold more than three-quarters of excess savings, according to Moody’s Analytics.
Households have relied more on credit cards, and more have carried balances month to month.
Balances rose to more than $1.1 trillion in the first quarter, New York Fed data shows. That was the second-highest balance on record, after the fourth quarter of last year, and an increase of around a third compared with 2022. For individual borrowers, the average total credit-card balance was more than $6,000 in the first quarter, according to TransUnion, an increase of nearly a quarter from two years earlier.
Action Line: You know Your Survival Guy likes to live debt-free. If interest rates go up, I want them helping me by producing more income in my portfolio, not dragging me down with higher payments on my depreciating assets. When you want to talk about income in your portfolio, I’m here. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.
