Paycheck-to-Paycheck Consumers Continue to Struggle With High Interest Rates

Since March 2023, the Federal Reserve has regularly increased interest rates, reaching highs of more than 5%. The Fed’s aim has been to stem rising inflation, which reached an all-time high of 9.1% in July 2022. In the last few months, inflation has gradually decreased, falling to 2.4% as of September 2024, the smallest 12-month increase since February 2021.¹ With easing inflation, interest rates have also dropped somewhat. However, this has yet to significantly impact savings account or credit product interest rates.

For instance, financially stable consumers continue to chase high-interest savings accounts. Meanwhile, paycheck-to-paycheck consumers, who tend to hold little savings and often turn to credit to cover monthly expenses, worry about increasing interest rates on the credit products they use. These facts highlight how high interest rates would impact consumers with different financial lifestyles.

These are just some of the findings detailed in this edition of “New Reality Check: The Paycheck-to-Paycheck Report,” a PYMNTS Intelligence exclusive report. This edition, How Financial Lifestyle Impacts Consumer Perception of High Interest Rates, examines the financial lifestyles of U.S. consumers and explores how inflationary pressures combined with high interest rates impact their financial standing and overall sentiment. It draws on insights from a survey of 2,364 U.S. consumers conducted from Sept. 3 to Sept. 17 and an analysis of other economic data.^{2, 3, 4}

• What’s at Stake
• Key Findings
• Conclusion
• Read More
• Methodology

What’s at Stake

PYMNTS Intelligence finds that 66% of consumers lived paycheck to paycheck as of September 2024. An increase of 3 percentage points relative to September 2023, the share of consumers living paycheck to paycheck has reached a high not seen since March 2020. Meanwhile, the share of consumers living paycheck to paycheck increased 1 percentage point in the last month alone. This suggests that the volatile changes evident since January continue.

In the last month, growth in the share of paycheck-to-paycheck consumers was entirely due to a rise in the share of paycheck-to-paycheck consumers without issues paying their monthly bills. The share of paycheck-to-paycheck consumers living without difficulty currently stands at 43%, up from 40% last month. In contrast, the share of consumers struggling with monthly expenses declined for the first time since February. That share decreased from 25% to 23%. These shifts suggest that even as inflationary pressures continue to impact consumers’ financial standing, consumers continue to find ways to adjust their spending and meet their monthly expenses.

Key Findings

Financial lifestyle drives consumers’ ability to save more than age or income, suggesting that financial management and literacy are key.

Setting aside savings is a challenge for consumers living paycheck to paycheck. Nonetheless, those who struggle to pay their monthly bills find ways to hold on to the savings they have. In fact, struggling paycheck-to-paycheck consumers average $2,447 in savings, while those living without difficulty average $7,558. Meanwhile, the typical consumer not living paycheck to paycheck has more than three times the average savings of the typical consumer who does. As one might expect, savings rise with age and income. Yet, at $20,120, consumers not living paycheck to paycheck averaged the most savings. This suggests that, regardless of demographics, being more strategic about money management enables consumers to put aside more savings.

Our data also shows that 51% of paycheck-to-paycheck consumers struggling with monthly expenses have no readily available savings. In contrast, only 16% of paycheck-to-paycheck consumers without issues paying monthly bills and 4.3% of consumers not living paycheck to paycheck have no readily available savings. We also find that 39% of consumers earning less than $50,000 report having no readily available savings. Interestingly, the share of struggling paycheck-to-paycheck consumers who have no readily available savings is 31% greater than the share of low-income consumers who have no savings. This further suggests that financial management and financial literacy are factors in consumers’ ability to put aside savings.

Paycheck-to-paycheck consumers perceive high interest rates as a budgeting issue, while financially stable consumers view them an investment opportunity.

Consumers express varied views on future changes in the Fed interest rate based on their financial lifestyle. For instance, struggling paycheck-to-paycheck consumers, at 39%, are the most likely to believe that interest rates will rise. Financially stable consumers, in contrast, have more accurate expectations of interest rate changes in the next year than struggling consumers. While 32% of consumers not living paycheck to paycheck accurately predicted that interest rates would go down in the next 12 months, less than half of this share (14%) of struggling paycheck-to-paycheck consumers expect an interest drop. This suggests that consumers not living paycheck to paycheck may be more educated on interest rate trends than paycheck-to-paycheck consumers.

It must be noted that higher interest rates mean different things for consumers across financial lifestyles. When they expect a rise in interest rates, paycheck-to-paycheck consumers are reactionary with their finances. For example, approximately 2 in 5 of these consumers opt to spend less and to avoid using credit. Only 16% of consumers not living paycheck to paycheck say they would use credit less if interest rates increased. This suggests more financially stable consumers are less dependent on credit than those living paycheck to paycheck.

Financially stable consumers tend to embrace higher interest rates. For example, 1 in 4 of those who expect rising interest rates say they will invest more in particular products. Savings volume follows these trends, with higher savers opting to invest more if interest rates increase. On the other hand, if interest rates fall, paycheck-to-paycheck consumers perceive this as an opportunity to save and improve budgeting. More than one-third cite being able to manage their finances more easily due to lower interest rates. Financially stable consumers are also the most likely to say they will invest strategically if interest rates decline.

Two-thirds of consumers consider competitive interest rates when selecting their FI.

Security, cost and convenience are the top drivers for consumers when choosing a financial institution (FI). Security and fraud protection features, at 81%, play the biggest role in why consumers select their FI. However, interest rates are also on the minds of many consumers. We find 66% of consumers note that competitive interest rates impact their decision. Older consumers prioritize interest rates, while younger consumers are more concerned with bank brand reputation and signup bonuses or rewards. These findings suggest that higher interest rates are of particular interest to financially stable consumers looking to grow their wealth.

High interest rates are a driving force in consumers’ ability to grow their savings and in their choice of FI. In fact, roughly 3 in 10 consumers would switch FIs for a better interest rate on bank accounts, credit products or investments. Consumers living paycheck to paycheck are slightly more likely to switch.

Data also shows that paycheck-to-paycheck consumers and those with low savings prioritize convenience and low fees when considering an FI. Struggling paycheck-to-paycheck consumers are the most likely to cite low fees as the most important factor when choosing an FI, at 17%. Consumers with less than $1,000 in savings also cite low fees as the most important factor, at 17%. In contrast, consumers not living paycheck-to-paycheck, at 13%, and those with over $15,000 in savings, at 14%, are the most likely to cite competitive interest rates as the most important factor in their decision. These findings indicate the extent to which financially stable consumers focus on strategic financial management when choosing an FI. Financially constrained consumers, in contrast, tend to focus on minimizing their spending to stay afloat in the moment.

Conclusion

With inflation continuing to show signs of easing, the Fed has begun to reduce interest rates. This trend is now evident in the declining interest rates on high-yield savings accounts. The interest rates offered by high-yield saving accounts have been a boon for those with the financial resources to reap the benefits of such investments.

Meanwhile, the high interest rates for credit products — especially credit cards — have seen little change. This negatively impacts paycheck-to-paycheck consumers, especially those who have little or no savings. These consumers frequently rely on credit products to cover their expenses. High interest rates are a burden that these consumers do their best to avoid. Whether consumers are chasing high interest rates to grow wealth or trying to mitigate them with better budgeting, this requires careful financial management and a new kind of financial literacy that may only get more complicated as the inflation versus interest rate drama continues to unfold.

Read More

PYMNTS Intelligence provides leading coverage of the trends in consumers’ financial lifestyles in the face of ongoing inflation. To stay up to date, subscribe to our newsletters and read our recent data reports chronicling the issues faced by paycheck-to-paycheck consumers.

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Methodology

“New Reality Check: The Paycheck-to-Paycheck Report,” a PYMNTS Intelligence exclusive report, draws on insights from a survey of 2,364 U.S. consumers conducted from Sept. 3 to Sept. 17. The Paycheck-to-Paycheck series also expands on existing data published by government agencies, such as the Federal Reserve and the Bureau of Labor Statistics, to provide a deep look into the core elements of American consumers’ financial wellness: income, savings, debt and spending choices. Our sample was balanced to match the U.S. adult population in a set of key demographic variables: 51% of respondents identified as female, 33% were college-educated and 38% declared incomes of more than $100,000 per year.

<sup>1. [Consumer Price Index. U.S. Bureau of Labor Statistics. 2024. https://www.bls.gov/cpi/. Accessed October 2024.] ↩
2. [Consumer Credit – G.19. Board of Governors of the Federal Reserve System. 2024. https://www.federalreserve.gov/releases/g19/current/. Accessed October 2024.] ↩
3. [Current Employment Statistics – CES (National). U.S. Bureau of Labor Statistics. 2024. https://www.bls.gov/ces/. Accessed October 2024.] ↩
4. [Consumer Price Index Summary. U.S. Bureau of Labor Statistics. 2024. https://www.bls.gov/news.release/cpi.nr0.htm. Accessed October 2024.] ↩</sup>