A decade after the financial crisis, the good news is that ARMs are far rarer — and their holders should be able to afford, or avoid, rate hikes.
“People aren’t using them as the crutch of affordability like they did before the housing crisis,” said Greg McBride, chief financial analyst at Bankrate.com. Thanks to tighter lending standards, homeowners with ARMs now tend to be affluent, he said. “They either plan to sell the home before the first adjustment comes, or it’s a product that works with their cash flow.”
That leaves rising rates on credit card debt as the biggest financial worry for many U.S. families. Card debt is typically based on a “prime rate” that’s directly linked to the fed funds rate. If the Fed pushes through a quarter-point increase, your card’s rate could go up by the same amount a month or two later.
Card Debt
If you owe money on your credit card, however, an extra quarter point might not make much difference. Take, for example, a consumer who owes $1,000 on a card with a 19 percent annual rate. If she only meets the minimum payments, Credit Karma estimates she won’t pay off the debt for more than five years, racking up $600 in total interest charges over that time period. If it goes up by a quarter point, she’ll end up owing just $16 extra in interest.
Still, there are reasons to worry about consumers’ credit card debt load long-term. Use of credit cards is rising faster than debit cards, as banks offer users lucrative rewards.
While unemployment is very low, Americans’ income still isn’t surging despite decades of stagnant wages. Fewer than 40 percent of consumers say they “always” pay their credit card bills in full each month, according to the CFPB. In a 2016 study by the Finra Investor Education Foundation, just 2-in-5 Americans said they’re able to spend less than they earn.
“It’s most impactful for the households that are already maxing out their household budget,” Debt Reduction Services’ Christensen said. “They don’t have any wiggle room.”
This article was provided by Bloomberg News.