Interesting Interest

In our industry people spend a lot of time fixated on interest rates.  More often than not it’s because we’ve been in an environment with historically low rates, and now they are starting to rise.  We predominantly talk about how rates affect portfolios and retirement plans, but there is something we tend not to talk about enough, and that is debt.

Generally speaking rising interest rates are going to have the most wide spread impact on consumer debt. Most common examples of consumer debt are auto loans, student loans, and credit cards and right now this debt is growing faster than ever before.  Consumer debt has risen almost 6% for the last two years and it’s expected that by the end of the year total non-mortgage consumer debt will surpass 4 trillion dollars outstanding!  Of this roughly 1 trillion is attributable to credit cards debt which is quickly approaching the highest it has ever been. This is important because as interest rates rise, credit card debt gets more expensive.

In the past we have discussed the Federal Reserve (Lord of the Rates) and how they affect interest rates.  Well, this year the Federal Reserve has forecast four rate hikes and they have already delivered on two of them placing the Fed Funds just under 2%.  According to an article on MarketWatch the latest rate hike is going to likely cost consumers $2.2 billion in interest and fees.  As we move forward, and rates continue to rise the increased interest could cause strain on consumers who are already spending 10% of their income just on credit cards alone.

Now despite the warning signs things aren’t out of control yet.  Despite credit card debt reaching near highs, consumers are still using 33% less income to pay that debt per month than back in 2008.  Coupled with low delinquency rates at 2.4% and things aren’t in a terrible place.  LendingTree chief economist Tendayi Kapfidze says "It's a level of debt that's pretty manageable for consumers on aggregate,".   All said and done consumer debt is increasing at a steady rate, largely fueled by ballooning student loans and credit cards.  Obviously taking on debt is never ideal strategy but sometimes you can’t avoid it.   The best course of action is to just make sure it’s in a manageable position so that if interest rates continue to rise or there is a dip in the market you’re not in a bad spot.