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Credit card debt expected to grow after interest rate hike

One sign that the Federal Reserve Bank believes that the American economy is recovering could also lead to much more expensive credit card debt for consumers in Virginia and across the country. For consumers with debt, including credit card debt, home equity lines of credit or adjustable-rate mortgages, monthly payments can be expected to rise following the Fed's interest rate hike.

These types of consumer debt carry variable interest rates. The rates go up or down depending on the fluctuations of the prime rate, the Federal Reserve's short-term federal funds target rate. On June 14, the Fed announced that it was increasing that rate by one-quarter of a percentage point.

This small hike is part of a planned series of interest rate increases, including further increases expected in 2017 and more to come through 2019. The rate had been sitting at rock bottom since 2008, when it was rapidly lowered in response to the mortgage, banking and financial crisis in the United States.

The changes in the rate don't just impact the amount of money banks pay each other for overnight loans of Federal Reserve funds. This "prime" rate is used to underlie interest rates for a variety of consumer debt accounts. For a person with an average credit card balance of $5,000, this rate hike is likely to lead to an increase of around $175 in interest over the year. Smaller but still significant increases will also be felt by borrowers with home equity lines of credit or adjustable-rate mortgages.

For people who are already struggling to make their monthly minimum credit card payments, this rate hike will be particularly daunting. The compounding nature of credit card interest means that people who carry a balance will be rapidly affected by the rate hike. People who are unable to pay back their debts and are facing collection calls and defaults on credit cards and other consumer debt may wish to consult a bankruptcy lawyer to discuss options. A lawyer can provide guidance about types of bankruptcy filings, including Chapter 13 or Chapter 7 bankruptcy, and other options to address overwhelming debt.

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Bowen Ten Cardani, PC

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