US Fed Rate Hike Hits Credit Card Debt First as Variable Rates Rise

The US Federal Reserve’s rate increase is expected to first raise interest burdens for households using variable-rate loans such as credit cards and home equity lines of credit (HELOCs).

According to the Wall Street Journal, the Fed’s 0.25 percentage point rate hike will lead to rising rates on financial products tied to short-term rates. Charlie Wise, head of TransUnion Global Research, estimated that a household with an average $6,600 credit card balance would see monthly interest costs rise by about $1.38.

HELOC borrowers may face even faster increases in burden. HELOCs are variable-rate loans secured against home equity. With outstanding balances at $45.93 billion in the second quarter of this year, a 0.25 percentage point prime rate increase could raise annual repayment costs by up to $115 million for all borrowers.

Mark Fleming, Senior Economist at First American, noted that homeowners are increasingly using home equity to pay off other debts. He warned that rising credit card rates could further strain homeowners and potentially increase mortgage delinquencies.

Direct impacts on mortgages and auto loans are expected to be relatively limited. Mortgage rates move more closely with 10-year US Treasury yields than the Fed’s short-term policy rate, while auto loans are influenced by long-term market rates. Cox Automotive estimated that even after this hike, monthly payments for new cars would rise about $6, and used cars about $4.

Homebuilders’ exposure varies based on funding methods. Large firms relying on corporate bonds may be less sensitive to long-term Treasury yields, while smaller builders and house flippers dependent on short-term construction financing will face direct impacts from the Fed’s rate hike. Rising mortgage rates could also increase costs for mortgage subsidies aimed at boosting sales.

Corporate and municipal borrowing rates have already reflected much of this expected hike. Investment-grade corporate bond yields rose from about 5.4% a month ago to 5.8% recently. If market expectations hold, further rate increases are unlikely to push bond yields significantly higher.

The future impact on financial markets will depend on the number of additional Fed hikes and long-term Treasury yield trends. While the immediate burden is limited, credit card and HELOC costs accumulate with each rate rise. Conversely, depositors may benefit from higher interest income if banks pass on policy rate increases to savings rates.