Hike In Fed Rate Adds Hundreds Of Millions of Dollars to Credit Card Debt

This week’s rise in the Federal funds rate will pile an additional $409 million in debt onto the balances of consumers in 200 U.S. cities hold on their credit cards, according to a ValuePenguin analysis. For the entire country, we estimate, the increase in card debt due to higher rates could be in the order of $883 million.

Our calculations are based on the proportion of consumers (36%, according to a recent Gallup study) who carry over a balance on their cards from month to month, and therefore would incur interest charges, and the impact of the quarter-point rise in rates, which analysts expect to be passed along in full through higher APRs on credit card balances.

In New York, the city with the single largest amount of debt held on cards, the hike would see New Yorkers saddled with an additional $36.6 million in credit card charges. Other cities where the additional debt from the hike will likely run to eight figures include Los Angeles ($23.2 million), Chicago ($17.5M), Dallas-Fort Worth ($12.3M), Philadelphia ($11.6M), Washington ($11.4M),Houston ($11.2M), Miami-Fort Lauderdale ($10.5M), and Atlanta ($10.3M).

The impact of the rate hike on the typical American who carries a balance on their credit cards is fairly modest--in the order of $14 a year. But the effect on cities and the country as a whole could be considerable. After all, money that’s used to pay credit-card interest charges is money that can’t be spent, invested, or otherwise used to consumers’ benefit. And the added interest charges might eventually drive up total credit-card debt in the U.S., possibly creating further financial ripples.

The figures we cite are, if anything, conservative. They reflect the debt that’s carried over, and subject to interest, for only those cardholders who report that they usually carry over their balance. Our estimates do not reflect the debt charges paid by those who may occasionally carry over a balance --after the holidays, say, or following a summer vacation.

Methodology

Our analysts examined city-level credit card debt data from Experian, and crossed that with adult population estimates for each area. We assumed roughly 71% of each city’s adult population carries at least one credit card, based on a previous Gallup poll. Of that number, we considered just 36% of cardholders in the calculations, as the same Gallup poll showed this is the portion of cardholders who usually carry a balance on their credit card. Those who seldom carry a balance would not contribute much to the total interest paid for each city, and were therefore excluded.

To calculate the amount of interest paid, we took the most recent data from the Federal Reserve’s G.19 Consumer Credit Report, which shows the average interest-bearing credit card account assessed 13.61% interest in 2016. We then applied the 0.25-point interest hike to calculate the new interest charges, and from there got the difference.