By Zoe Han
People living in rural areas are already struggling to pay off credit card loans and buy expensive items like cars, experts say
The Federal Reserve hiked interest rates by 0.75 percentage points on Wednesday in an attempt to stem rising consumer goods and services costs.
While economists say raising interest rates will help cool consumer demand and hopefully ease record-high inflation, it will also raise the cost of borrowing for everything from homes to car loans. Households with lower incomes and credit card debt — households with a median income of $16,290 a year and $35,630 a year — tend to have higher debt-to-income ratios than wealthier Americans, according to Federal Reserve data.
The Fed’s four rate hikes this year could hurt low-income families more than most, said Radha Seshagiri, public policy and system change director at SaverLife, a nonprofit that helps low- and middle-income families save money. They’re already struggling to pay off credit card loans and buy large items like cars due to rising costs, she said.
Seshagiri said that most of the people her group serves are hourly wage earners – who earn their living by the number of hours worked in a given week – and need a car for their daily commute, either because they live in rural areas, where public transport is unavailable or because they work night shifts. They have been hit hard, she added, by the rising cost of food and petrol.
“People are starting to write their basic needs and daily expenses on their credit cards,” Seshagiri said.
Inflation hit a 41-year high in June, with prices for consumer goods and services rising 9.1% year-on-year. The price of groceries is up 12.2% year-on-year last month, and gasoline is up more than $1 since that time last year, to $4.25 on Thursday.
But recent increases in the cost of living have had an even greater impact on rural America, according to a report by Iowa State University professor Dave Peters, who studied the impact of inflation in small towns. “The biggest inflationary impact on rural households has been increased transportation costs, which are essential in rural areas where residents have to travel longer distances to work, school, or shop for daily necessities.” Peters wrote.
Rural residents are paying $2,470 more annually for gasoline and diesel than they were two years ago, while urban dwellers are paying $2,057 more, the report says.
Savings are running out
Americans were already drawing on their savings to meet the rising costs. The personal savings rate — the percentage of disposable income people save — fell to 5.4% in May from 10.4% in May 2021, hitting one of the lowest levels in decades, according to the Bureau of Economic Analysis.
“Eventually those savings will run out,” Seshagiri added.
According to a recent Forbes Advisor poll, about 40% of Americans said they are already relying on their credit cards more because of inflation.
“Excessively high inflation tends to undermine consumers’ purchasing power, especially when their wages or other sources of income have not increased,” according to a report by Michael Fisher, an analyst at financial website TradingPedia. “Consumers may therefore need to borrow to meet the rising cost of living.”
At the same time, the default rate for credit card debt was 1.73% in the first quarter of 2022, down from a recent low of 1.48% in the first quarter of 2021, according to the Federal Reserve.
With the cost of borrowing rising, lower-income Americans and their credit scores may be more vulnerable, Seshagiri said.
“As they put their spending on these credit cards and we see interest rates going up, credit card balances will go up,” he said. “So that’s a heavier burden now for these people to carry with these rate hikes.”
She said it would hurt those who are already struggling to make their minimum monthly payment. It could potentially lead to more defaults, thereby hurting their credit scores, she said.
“It will ultimately stop those people from buying a home…all those things that help people invest in their families or go to work,” Seshagiri added.
Lower-income Americans may have more difficulty buying used cars, she said. Early in the pandemic, a shortage of chips forced many automakers to shut down production, and a lack of inventory drove up new car prices. Consumers turned to used cars, which pushed those prices up.
According to a recent report by auto shopping app CoPilot, the average list price for used cars rose to $33,341 in June, up 0.5% month-on-month and $172 below March’s peak. The current list price for used automobiles is one of the highest values ever.
Peters found that people in rural areas see faster increases in the cost of used cars and trucks than people in cities, partly because people who live in cities tend to have more public transportation.
– Zoe Han
(ENDS) Dow Jones Newswires
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