Liz Claman, Host: So, even though the Fed just hiked rates yesterday, consumers may start to feel the strain on their wallets sooner than they think. The majority of credit card holders can expect to see a change in their next statement, as more cards have shifted to variable rates and homeowners, of course, should expect a hike in their adjustable rate mortgages.
So, if rates keep rising, how can consumers protect themselves from falling deeper into debt? That's a big question here. So, let's ask Mike Fratantoni, he is Senior Director at the Mortgage Bankers Association and Michael McAuliffe, President of Family Credit Counseling Service. Good to see you both, gentlemen.
Michael McAuliffe, President, Family Credit Counseling Service: Hello.
Mike Fratantoni, Senior Director, Mortgage Bankers Association: Good morning.
Claman:
Boy, guys, we so need your advice, let's get started. Mister McAuliffe, I'll start with you. Just so we get our time line right-when and by how much might credit card holders and consumers start to feel the impact of rising interest rates?
McAuliffe: Well, actually, as you said, eighty percent of credit cards now have variable rates of interest.
Claman: Mm-hmm.
McAuliffe: And you're gonna start seeing your interest rate go up on your next statement.
Claman: By how much?
McAuliffe: A quarter point.
Claman: Same as the Fed?
McAuliffe: Yes.
Claman: Great okay, what do you suggest people do to lessen the impact of those higher rates?
McAuliffe: Well, the first thing you have to do is stop using the credit cards. That's a problem for people, they don't want to do it, but credit cards are very expensive ways to borrow money.
Claman: But I get mileage mine's hooked up to miles.
McAuliffe: If you're able to pay it off every month, if you're that disciplined, then it certainly is fine. But the problem is, it's so easy and so tempting, with those low minimum payments
Claman: Right.
McAuliffe: to let it stretch out for a long period of time.
Claman: We have some tips on the screen-make minimum payments on all cards? Aww, c'mon, don't you think you should pay a little more than the minimum, if you can?
McAuliffe: Well, what we suggest is really becoming serious about debt reduction
Claman: Yes.
McAuliffe: make the minimum payments on every single card and put everything extra you possibly can toward the highest interest rate.
Claman: Oh, okay.
McAuliffe: A lot of people, what they want to do, is they want to psychologically-if they feel better, they put it towards the highest balance, the lowest balance, spread it equally amongst all of them. You really need to focus on the highest interest.
Claman: And don't put the money from the home equity loan into the credit cards to pay that off. Which, brings me to Mister Fratantoni, Mike, we know adjustable rate mortgages, things like that are already starting to, uh, tick higher-reset this year. What should consumers with those arms be doing, if anything?
Fratantoni: Again, it's important to scale the problem. Our estimate is only about one in four households have an adjustable rate mortgage-only about fifteen percent of all homeowners. Because you've got to remember, about thirty-five percent of homeowners own their home free and clear.
Claman: Okay.
Fratantoni: Uh, and then when you look at the adjustable rate, uh, borrower population. You know, some of them have more traditional arms-where rates have been adjusting on an annual basis, or every six months.
So, they've seen some fairly steady increases in payments over time, and as you suggest, should expect another notch up. The one that a lot of people are watching is, the hybrid arm universe. Where people who had an initial fixed rate of three to five years, now, are gonna see a, a fairly big increase in their payment. You know, a, a, an increase in their rate of three, three-and-a-half percent, if they originated a loan back in '02 or '03.
Um, you know, we're gonna be keeping an eye on that. But, we released our, our National Delinquency Survey a couple of weeks ago. Saw a slight up-tick in arm delinquencies. Uh, and we expect it to continue.
Claman: What about foreclosures? Have you seen more foreclosures?
Fratantoni: Again, a slight increase, not, not a major increase. Um, and, uh, some of this is due to the rise in short-term rates. If you at our application survey, out this morning. You know, still, about twenty-eight percent of borrowers are taking out adjustable rate loans. So, you know, with ano-about half of those being hybrid loans with an initial fixed period.
Claman: Mister McAuliffe, is credit card debt on the rise? I mean, are people getting into trouble? What's really happening out there with the consumers?
McAuliffe: Yes, we have two different things. One, is credit card debt is at an all time high, it's actually over eight hundred billion dollars, now, in revolving debt.
Claman: Wow!
McAuliffe: The good part is, we are managing it better. Credit card delinquencies are at a fifteen year low, in the fourth quarter of last year.
Claman: Good deal.
McAuliffe: But, with interest rates rising, and there's no telling how high they're going to go. Eighty percent of credit cards have a mixed variable interest rate. Interest rates keep rising, minimum payments have already gone up.
Last year the government required the credit card companies to start-at least having us make an impact on our credit card debt. And, it's going to catch us.
Claman:
We want both of you guys back. Because as things reset and as rates go higher, I think your, your information is extremely valuable. Mike Fratantoni, is Senior Director at the Mortgage Bankers Association and Michael McAuliffe is President of Family Credit Counseling Service. Thanks to you both.
