Rising interest rates and inflation are squeezing consumers

Colorado consumers who carry credit card balances will be making higher payment in the months ahead. That is because the U.S. Federal reserve raised interest rates by a quarter point on March 22. The increase was the central bank’s ninth rate hike since March 2022. The benchmark federal funds rate is now between 4.75% and 5%, but the average credit card interest rate in the United States is 20.4% according to Bankrate. That is the highest figure reported since the financial services company began tracking the data in the 1980s.

Inflation and rising rates

This is a serious problem because 46% of the consumers who have credit cards carry balances from month to month, and many of them now rely on their cards to pay for necessities like food and fuel. The pressure on consumers is being amplified by soaring inflation that has pushed prices up and eroded the spending power of wages. Between October 2022 and January 2023, credit card balances in the United States increased by more than $60 billion and are now approaching $1 trillion. The Federal Reserve is increasing interest rates to fight inflation, but the tactic does not seem to be working very well. In January 2023, the consumer price index rose by another 0.5%. That brought the annual rate of inflation up to 6.4%.

K-shaped recovery

The economic consequences of high inflation and rising interest rates are being felt most by low-income families. About half of the Americans with credit cards pay their bills in full each month, and they seem to be weathering the storm. This has led economists to refer to the current economy as a K-shaped recovery, which is a situation where economic benefits are not shared by all sectors of society. K-shaped recoveries often lead to civil discontent and rising personal bankruptcy rates.

Debt that lasts for decades

Consumers who use credit cards to pay for necessities rarely have enough money to pay more than their minimum monthly payments. If only minimum payments are made, credit card debt can take decades to pay off. When people find themselves in this predicament, bankruptcy may be their only escape.