The State Of The U.S. Credit Market Ahead Of The Rate Hike

Another rate hike is highly expected to be announced on Wednesday despite the stock market plunge on Monday. Since the last rate hike in March, most signs have indicated that the Federal Reserve will increase its target rate by another 25 basis points in June.

And this Wednesday, Fed Chair Janet Yellen is expected to make the announcement of another rate hike in 2017. That would be the fourth time Federal Reserve has hiked rates since December 2015.

For those who had credit just before the first rate hike, the implications of four rate hikes will weigh heavily on their interest expense. According to WalletHub, if the Federal Reserve raises the target rate by 0.25 basis points as expected, it would imply an additional $1.5 billion in extra finance charges during 2017.

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And in total, when you factor in the previous three rate hikes, then the additional cost in finance charges this year will be about $6 billion compared to a scenario with zero rate hikes. This is likely to make an already tough situation in the credit market worse. Based on the latest data, estimates indicate that outstanding credit card balances will surpass $1 trillion in 2017.

As such, the credit market is in for a time of reckoning as the Federal Reserve sets its sights on a rate hike binge in 2017. This has somewhat affected the market with consumer credit falling to $8.2 billion in April from $19.5 billion in March.

Reports from credit repair companies indicate that consumers are also seeking to improve their credit scores as they prepare for higher lending rates going forward. Most people are now going for credit monitoring services, which according to reviews of CreditRepair.com and more cost from just $25.00 a month. So, basically, no one wants to sit around and assume everything will fall into place. With interest rates changing rapidly, a lot could happen that can affect credit scores.

While credit card lending rates might be easier to predict when it comes to auto loans and mortgage rates things become a little bit complicated. They are long-term in nature, which makes them difficult to predict.

Just to illustrate the potential change in these rates, the APR on the average 30-year fixed rate mortgage increased from 3.48% in late June 2016 to 3.89% in early June 2017. Yet in December 2016, it reached 4.32%, reports WalletHub. This indicates how unpredictable this rate is now as lenders continue to juggle with the issue of rising interest rates.

On the other hand, average APR on a 48-month new car loan rose from 4.00% in November 2015 to 4.52% in February 2017. More data is expected soon, which could tip over the scales again.

Now, with CME Group (Nasdaq: CME) and Investing.com both having rate-hike odds of more than 90%, it seems inevitable that the Federal Reserve will raise interest rates on Wednesday. Yet this comes during a week when the Nasdaq100 (NDX) closed on Monday 188 points (3.2%) below the previous week’s close while both the S&P 500 Index (SPX) and the Dow Jones Industrial Index (DJI) also lost points.

The massive drop in points on Nasdaq100 could be attributed to various declines in tech stocks. The shares of Apple (Nasdaq: AAPL), Nvidia (Nasdaq: NVDA), and Microsoft Corporation (Nasdaq: MSFT) among others continued to fall on Monday amid what investors are calling the bursting of the tech bubble. Nonetheless, it still remains to be seen whether the market can survive another rate hike at a time when the U.S. economy is being put to the test.

Conclusion

In summary, the US credit Market appears to be in a dire state. In fact, the last time credit card outstanding balances approached the $1 trillion mark was in 2008, during the global financial crises while last year it breached the $980 million mark.

It is safe to say that the US is, in no risk of a financial crisis, but these rate hikes could have serious ramifications is the process is not implemented with caution.

For now, borrowers will be looking to tweak their credit scores in a bid to improve their bargaining powers against their lenders. The US credit market appears set for some interesting times ahead.