Card rate increases give users bigger bill

Consumers have started taking a hit to their wallets following the Federal Reserve's Dec. 14 increase in the federal funds rate.

That's according to WalletHub, a Washington-based source for credit information and financial products, which recently released a report on the "2016 Credit Card Landscape" (at wallethub.com/edu, search for "credit card landscape report").

The Federal Reserve increased its key short-term interest rate by 0.25 percent, to a range of 0.50 percent to 0.75 percent.

With annual percentage rates on credit cards averaging from 15 percent to 20 percent, and variable rates tied directly to the Fed's benchmark rate, that quarter-percentage-point increase means you'll pay an extra $̶2̶5̶ $2.50* a year in interest for every $1,000 of debt.

WalletHub says that across the economy, the quarter-percent interest rate increase is expected to cost consumers roughly $1.4 billion in additional credit-card finance charges. And WalletHub analyst Jill Gonzalez estimates that a person with $10,000 in credit-card debt will now pay, on average, about $3.50 more each month, or a total of $42 a year, in flat interest and finance charges.

However, there can be a multiplier effect -- because interest compounds, consumers could be paying interest not only on the balance of what they owe, but also on the interest that may have been accumulating on it.

On average, annual percentage rates for new credit-card offers rose 18 basis points in anticipation of the December rate increase and another 13 basis points afterward, the report says.

"One basis point represents 0.01 percent; this is a common method of measuring interest rates," Gonzalez explains. "For example, a hike of 100 basis points translates into a 1 percent interest raise."

And, she says, you can anticipate a similar increase if and when -- as most analysts are predicting it will do sooner rather than later -- the Fed raises short-term interest rates again.

Credit-card companies have also continued to raise fees, the report reveals. The average annual credit-card fee rose 2.19 percent relative to the third quarter of 2016, and has gone up 1.64 percent year over year, finishing 2016 at an average of $16.78, WalletHub reports.

Meanwhile, cash-advance fees are 66 percent higher than they were at the end of 2012, the report says, "which means credit card companies are continuing to exploit the weakness of cash-hungry customers. The average cash advance fee is now the greater of $14.73 or 4.01 percent of the amount withdrawn."

"This is not necessarily an industry marketing push, as issuers are aware that the need for cash will always be there," Gonzalez notes. However, she advises, "Consumers should try to use

the cash-advance feature only for emergencies. It is always cheaper to use a credit card for purchases than for cash."

DEEPER IN DEBT

Credit-card companies have also been pushing for customers to transfer balances from one credit card to another, by adding to the length of zero-percent balance-transfer promotions -- at 11.55 months, "longer than at any time in the past seven years," the report notes.

Meanwhile, "interest-free introductory terms are 17 percent longer for balance transfers than new purchases, and they're followed by a regular APR that is two percentage points lower on average.

"This discrepancy, which began to emerge in [the fourth quarter of] 2013, reinforces WalletHub's hypothesis that issuers are more intent on attracting the balances of consumers already mired in debt than incentivizing people to incur new debt in a recovering, yet uncertain economy."

Gonzalez says it doesn't so much reflect a greater industry marketing effort, however: "Issuers are targeting consumers that are already in debt, instead of trying to attract new consumers, since new debt is not as profitable."

0 PERCENT -- FOR HOW LONG?

Zero-interest balance transfers offer consumers one way to pay down high-interest card debt. But consumers need to be aware and wary as companies tempt them with balance-transfer offers.

"It's somewhat impossible to convince a credit-card company to stop marketing their products," she says, "but it's important for consumers to be informed and only apply for credit cards if they fit their needs.

"Consumers should focus on offers with zero-percent interest rate on balance transfers for longer periods -- 12-15 months or more," she adds. "They should also pay attention to balance-transfer fees."

The WalletHub report shows that collection-related complaints have declined for five straight quarters, falling 44 percent over that span, citing the Consumer Financial Protection Bureau's crackdown on the industry as a possible reason.

But with Congress and the administration promising to put that bureau in the political crosshairs, Gonzalez cautions, "the future of the [bureau] is hazy right now, even though it's doing important work and has helped protect consumers by regulating the credit-card market. If the bureau does vanish, it will create an unbalanced environment between consumers and issuers."

ActiveStyle on 02/20/2017

*CORRECTION: A quarter-percentage-point increase in the Federal Reserve’s benchmark interest rates would lead to an additional $2.50 in interest payments on $1,000 in credit-card debt. A previous version of this incorrectly reported the amount.

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