Those most likely to be harmed by higher borrowing costs are consumers who are relying on their credit cards to carry them through the economic downturn. According to Demos, a nonpartisan research and advocacy organization, most low- and middle-income households with high debt-stress levels -- the ratio of a family's credit card debt to their annual income -- use their credit cards to pay for unavoidable expenses, such as medical expenses or to cover household essentials after a job loss, not for discretionary items.
Higher rates lead to longer payoff periods and thousands of extra dollars in interest payments. Let's take the case of the average low- and middle-income consumers with $9,827 in credit card debt. If they continue to make a 2 percent monthly payment on that amount but at 13 percent interest plus prime, rather than our previous example of 10 percent interest, they must pay at least $19,897 in interest payments over the more than 45 years it will take to clear the balance. And because the prime rate is at historically low levels, this example likely presents a best-case scenario.
