Weekly Wrap: Higher Credit Card Rates Coming — SavingAdvice.com Blog


Credit Card Rates Going Up

The Federal Reserve hiked interest rates a half a point at its Wednesday meeting. As a result borrowing and credit card purchases will soon become more expensive.

Check Your Next Credit Card Bill

How soon? Very soon, Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report, tells Saving Advice.

“Credit Card rates will rise pretty quickly,” says Harzog. “The last time the Fed raised rates, it took about a month for the increase to reach consumers. That’s why it is important to pay down credit card debt.”

It’s Only Half A Point

You might not think raising rates half a percent is a big deal, but Harzog disagrees.

“If you have credit card debt,” she says, “half a point rate increase is a big deal. That’s because credit card debt is toxic debt. Interest on credit cards is compound interest and builds over time.”

From Pay Down To Pay Up

We paid off $83 billion in credit card debt during the pandemic. However, we have begun to backslide. We increased credit card debt by $52 billion in the last quarter of last year.

Government stimulus payments helped many get through the Covid-19 lock-downs. In addition, many people used that money to retire or reduce debts, such as credit cards. Now, with that money gone and prices rising, many are returning to form.

Devil Is in Details and APR

Here is how the Fed raising rates impacts your credit card bill.

When the Fed increases its federal funds rate, the prime lending rate goes up. When the prime goes up, the APR (annual percentage rate) on your credit card goes up as well. Almost all credit cards carry an APR.

Interest on credit cards is applied to outstanding balances. A higher APR means you pay more in interest on your purchases. In turn, that can mean it will take you longer to pay your card off.

What To Do

“It is important to pay down credit card debt now,” says Harzog.”

If you are able to pay off your credit card purchases each month, you will carry a zero balance. That means you pay no interest.

If you have a balance, you can reduce the impact of a rising APR by paying it off as soon as possible. However, Harzog advises against storing money away to pay debt all at once.

“It’s better to pay as you go,” says Harzog. “The first thing consumers need to do is build an emergency fund. So, if you save a thousand dollars a month, put some in an emergency fund and throw the rest at credit card debt.”

When a Raise is a Pay Cut

The U. S. Bureau of Labor Statistics began keeping tabs on changes in wages in 2001 when it created the Employment Cost Index. The index posted its greatest increase on record in the first quarter of this year rising by 1.4 percent. However, inflation stole that increase and more from most workers.

Inflation Outpaces Rising Wages

Last year, as the great resignation took hold, a national job shortage developed. As a result, employers have been forced to raise wages. In the last 12 months, the ECI has climbed 4.5 percent.

In addition, a recent survey of employers by brokerage and advisory firm Willis Towers Watson (WTW) found that 32 percent have increased their salary projections for 2022.

“Companies are now budgeting an overall average increase of 3.4% in 2022, compared with the average 3.0% increase they had budgeted in June 2021,” according to the WTW report.

That sounds good until you consider that inflation rose 8.5 percent year-over-year in March. That is the fastest inflation rate since 1981.

Looking Ahead

As noted earlier, the Federal Reserve is trying to rein in inflation. However, that may take time and may not be successful.

Decades ago, unions factored inflation into labor contracts. However, with the decline of labor organizations, most employers do not consider inflation when determining compensation. Rather, the supply of labor determines wage hikes.

We are in the midst of a labor shortage. That is what is driving wage increases now.

Looking ahead, Peterson Institute for International Economics (PIIE) sees the labor shortage as a key component of future wage increases. Jason Furman of PIIE and Wilson Powell III of Harvard’s Kennedy School of Government made their case in a recent blog.

“The outlook for real wage growth depends on several factors,” write Furman and Powell, “including: the tightness of labor markets, which should lead to more upward pressure on nominal wages than on prices…”

Know Your Fund’s Expense Ratio

You probably know you can spread your investment risk by putting your money in mutual funds and ETFs. However, you may not realize that before your money is invested, a portion is siphoned off to cover your fund’s expense ratio.

What Is This

Typically, a fund describes its expense ratio as the cost of operating the fund. That may include advertising and marketing as well as administration and management costs.

Expense ratios are a small percentage of the amount you invest. However, they are charged each year. Over time, that cost can add up. As a result, a lower expense ratio means more of your money is being put to work in the fund.

Active vs Passive Funds

There are a lot of factors that should be considered in selecting an investment fund. One of those is whether the fund is actively managed.

An active fund incurs more expenses because it makes more transactions and typically does more research than a passive fund.

Passive funds are often called index funds because they sink money into a particular index such as the Dow Jones Industrial Average or the Nasdaq Composite. These funds make few if any trades, so their expenses are lower.

Not Obvious

Transaction fees in a fund, such as commissions, are separate from expense ratios. In addition, you may not notice expense ratios, because they are deducted from investment returns. However, they are disclosed in a fund’s prospectus.

With the advent of ETFs, mutual funds began lowering their expense ratios from 1990 to 2020. Last year that trend began to change.

What To Look For

You should research any investment — including mutual funds and ETFs. Among other things, that means reading a fund’s prospectus or annual report to learn its expense ratio.

“A good rule of thumb is anything under .2% is considered a low fee” reports Next Advisor, “and anything over 1% is high, according to many experts.”

Gabi Slemer is a Chartered Financial Analyst and the founder of Finasana, an online money management platform. She details the cost of expense ratios.

“Fees are really confusing, some argue on purpose,” Slemer says. “Expense ratios are quoted in percentage points, which to many people can sound pretty low. 1 to 2%? That’s nothing. Well, actually when you consider that your return may only be 10%, 2% is actually 20% of your entire return. Said differently, if you make 10% on $1,000 that’s $100. If you’re paying an expense ratio of 2%, you owe $20, meaning your actual return was only 8%, or $80.”

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Originally published at https://www.savingadvice.com on May 8, 2022.