Via Marketwatch

A mere quarter percentage point rate increase by the Federal Reserve might seem small and gradual, but for millions of consumers with credit card debt it will be stinging.

In a report this week, WalletHub analyzed data and found that U.S. consumers have been piling on credit card debt at an alarming pace, adding $92 billion in new debt last year alone—twice the postrecession average.

Lenders so far seem only too happy to extend credit, thanks to low levels of defaults and charge-offs, but the day of reckoning is coming, warns WalletHub.

“Only four times in the past 30 years have we spent so much in a year. And in each of those prior cases, the charge-off rate—currently hovering near historic lows—rose the following year,” said WalletHub.

 

And rising interest rates are only going to hurt these consumers. The Federal Reserve is expected to raise interest rate by a quarter of a percentage point on Wednesday with two more penciled in for later this year.

Average credit card debt levels are already higher than what consumer can handle, according to WalletHub.

“The average household’s balance in the at $8,600, is $138 higher than the level WalletHub has identified as being sustainable,” the report said.

Credit card companies, like commercial banks, adjust interest they charge their customers after the Fed raises key interest rates. When an average balance is in the neighborhood of $8,600 the minimum payment goes up, burdening consumers and potentially forcing them to reduce overall consumption. According to Bankrate.com, the average credit-card interest rate is 16.8%.

The WalletHub research found that consumers in certain cities were in a much worse shape financially. For example, more than 60% of New Yorkers carried credit card balance and an average household balance was $10,193, much higher the national average.

The cost of this rate hike to someone with that much debt in New York is $153, as debt to income ratios are pretty high at more than 20%. It will take more than 50 months to pay off the debt.

This cost will only rise, as the Fed is currently projecting to raise rates a few more times until the end of the year and perhaps three more times next year.

On an aggregate level, household debt to GDP ratio has been flat over the past few years, according to St. Louis Federal Reserve data. But nominal credit card debt levels have been rising, surpassing $1 trillion over the past quarter.

“It isn’t a question of whether consumers are weakening financially, but rather how long this trend toward prerecession habits will last and just how bad it will get,” the report said.