The recent increase in interest rates is already affecting the spending habits of low- and middle-income consumers.
Posted Mar 1, 2005
Rising interest rates are starting to influence spending habits of low- and middle-income consumers, according to a new credit survey from Experian and The Gallup Organization. There are a little more than 2,000 survey respondents. "One of the interesting things is that the affect of rising interest rates has been below everyone's radar screen," says Dennis Jacobe, The Gallup Organization's chief economist. "Though interest rates are still at historically low levels, the change in interest rates does have an affect on consumer spending. Lower income consumers are affected even more. Businesses need to plan accordingly."
The Federal Reserve has increased interest rates 1.5 percent in the last several months, prompting a rise in variable, short-term rates for credit cards, home equity loans, and other credit instruments consumers tend to use to make purchases. To date, long-term interest rates for home mortgage loans have increased only marginally.
According to the survey, during the past six months 33 percent of consumers say they have reduced the amount they owe, while an almost equal number, 28 percent, say they have added to it. When looking to the next six months, however, 52 percent of consumers expect to reduce their debt, compared to just 15 percent who expect to increase it. Three in four consumers have a credit card and most of these consumers, 69 percent, report having a fixed interest rate. Similarly, about half of the consumers have a home mortgage, and 87 percent of these consumers say the mortgage rate is fixed rather than variable.
Consumers with a home equity loan or line of credit, however, are much more likely to have variable interest rates. Thirty percent of the consumers with an equity loan, and 45 percent with an equity line of credit, reported having variable rates. Among these consumers, more than a third say their interest rates have increased over the past six months. Overall, about a quarter of all consumers have some type of variable credit, either on a credit card, a home mortgage, equity loan, or equity line of credit. Among these consumers 25 percent report feeling the pinch of interest rates, compared to 18 percent of consumers who do not have such loans.
The survey also pointed out that most consumers know little about the increasing importance of credit reports, which are used by employers, insurers, and creditors. Only half of consumers ever check their credit report, 70 percent weren't aware that employers often check the reports, and 40 percent didn't realize they were used in student loan application reviews.
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