The Fed increased interest rates 25 basis points,
that is, .25%, and, the banks followed along.
Lots of consumer credit is tied to “prime” rates set by banks.
Which uniformly go up when the Fed raises its rate, which is why the Fed raises that rate.
How Much Consumer Credit Is Tied To Prime Rates?
According to Alistair Gray of the Financial Times:
About 92m consumers who have taken out loans with variable rates, such as credit cards, face higher monthly debt service payments as a result, according to TransUnion, which keeps an anonymised database of 220m borrowers. On average, the monthly increase comes to $6.45 per month.
Are people really $6.45 per month away from filing bankruptcy?
Some are, but, that is per loan or credit card.
What if you are already in the hole, borrowing just to make the minimum payments each month?
And the Fed signaled more rate increases are coming in 2017.
According to the interest rate story, about ten per cent of those 92 million could be pushed into default over the interest rate rise.
However, TransUnion projects that the credit card delinquency rate — the proportion of customers at least 90 days behind on repayments — will next year reach 1.82 per cent, its highest level since 2011.
What About Car Loans?
Though these loans tend to be fixed, so unaffected by interest rate increases, the news there is also bad:
Subprime borrowers are falling behind on their car loan payments at the highest rate in more than six years, and some bonds backed by these loans are vulnerable to getting downgraded, according to S&P Global Ratings.
Competition has spurred lenders to loosen standards and resulted in more delinquencies and default by people with weak credit, the ratings firm said. Subprime borrowers were behind by more than 60 days on about 4.85 percent of auto loans in August, the highest level since January 2010. The rate was 4.14 percent in August of last year, S&P said. For prime loans, delinquencies in August rose to 0.5 percent from 0.41 percent in the same month in 2015. The figures apply to loans that have been bundled into bonds.
I am still amazed how folks with one or two, even three, vehicle repossessions on their credit report can get a new vehicle loan. But I have seen it.
Still, I see it when those folks come in to my office to file bankruptcy.
Car repossessed, and falling behind on credit cards, means, more bankruptcy filings are on the way.