Wall Street may find the need to freak out over whether the Fed is going to raise rates, but for Main Street, the concern is more remote.
That's because most consumers will feel little impact should the U.S. central bank decide to enact a quarter-point hike. In fact, for 9 out of 10 people holding variable-rate loan or credit card debt, the typical impact will be a few dollars a month, according to a study that credit information service TransUnion released Monday.
"There's a lot of anticipation about what the impact will be (and) who is really exposed" if the Fed hikes rates, Nidhi Verma, senior director of financial services research and industry insights, said in an interview. "The good news is that the impact will be one that most consumers can absorb."
To be more precise, a rate hike would hit 92 million people holding various debt instruments with interest rates that depend on what the Fed does. The average impact: $6.45.
Average hit from a rate hike
| Rate increase | $1-$10 | $10-$25 | $25-$50 | $50 or more |
|---|---|---|---|---|
| 0.25% | 82% | 13% | 4% | 1% |
| 0.50% | 67% | 21% | 8% | 4% |
| 1% | 46% | 26% | 16% | 12% |
Source: Source: TransUnion
Adjustable-rate debt gets affected because it is tied to the prime rate, which immediately moves when the Fed acts. The current prime rate is 3.5 percent — 3 percent plus the top of the range the Fed targets for its overnight funds rate, which currently is 0.25 percent to 0.5 percent.
Potentially, the total number of affected consumers is closer to 137 million. But borrowers or cardholders who pay extremely high rates don't feel the impact, because issuers usually are barred by law from increasing those rates further. However, others will see a quick impact.
Verma advises people in debt to take an inventory of where they stand, even if chances of a Fed hike anytime soon seem at the moment to be remote.
"We're just being proactive," she said. "It's important to be prepared and know who these consumers are that may be a risk. ... Consumers need to identify and recognize what products in their credit wallet have adjustable rates."
In all, TransUnion estimates that about 9.3 million borrowers won't be able to handle a quarter-point increase. Should the Fed unexpectedly get aggressive in hiking, that number of at-risk consumers would swell to 11.8 million under a full percentage-point increase.
The market is betting against an aggressive central bank. Traders at the CME are assigning just a 12 percent chance for a hike at this week's Federal Open Market Committee meeting, which concludes Wednesday. There is a 55 percent chance of a quarter-point move before the end of the year, with only a minor chance of any more moves through July 2017.
People who feel they can't handle the hike should contact their lenders or creditors to try to make arrangements, Verma said.
"Start thinking about budget changes (like), 'Do I have to spend $5 for my Starbuck's coffee,'" she said. "Pick up the phone and talk to your lender. It's much more profitable for a bank to do that than to let the card go into default."