66% of Consumers Consider Interest Rates When Choosing Their Banks

How do consumers calculate interest rates as part of their financial planning? A PYMNTS Intelligence study, titled “How Financial Lifestyle Impacts Consumer Perception of High Interest Rates,” surveyed 2,364 U.S. consumers and analyzed additional economic data to explore the financial standing and sentiment amid inflationary pressures and fluctuating interest rates.

The findings highlight a stark contrast in how different financial lifestyles perceive and are impacted by the Federal Reserve’s monetary policy, particularly the sustained high interest rates enacted since March 2023.

The report underscores that financial lifestyle, more so than age or income, dictates a consumer’s ability to save. Paycheck-to-paycheck consumers, who often lack substantial savings and rely on credit to manage monthly expenses, are particularly vulnerable to rising interest rates on credit products. While financially stable consumers actively seek high-interest savings accounts, those living paycheck to paycheck worry about the increased cost of borrowing.

Notably, even among paycheck-to-paycheck consumers, those struggling with monthly bills hold an average of $2,447 in savings, while those without difficulty average $7,558. In contrast, individuals not living paycheck to paycheck have significantly more savings, averaging $20,120.

This divergence in financial standing shapes how consumers view and react to interest rate changes, with paycheck-to-paycheck individuals seeing rate increases as a budgeting challenge, and financially stable consumers viewing them as an investment opportunity.

 

Key data points from the report include:

• Two-thirds of U.S. consumers (66%) were living paycheck to paycheck as of September 2024, marking a 3 percentage point increase from the previous year and the highest level since March 2020.
• A significant 51% of paycheck-to-paycheck consumers struggling with monthly expenses have no readily available savings, compared to just 4.3% of consumers not living paycheck to paycheck.
• Competitive interest rates are a consideration for 66% of all consumers when selecting a financial institution, though older, more financially stable consumers prioritize rates more than younger individuals who focus on brand reputation and rewards.

Beyond these key findings, the PYMNTS Intelligence report explores the differing expectations consumers hold regarding future interest rate movements. Struggling paycheck-to-paycheck consumers are more likely to anticipate further rate increases, while financially stable individuals tend to have more accurate predictions of rate decreases.

The report also examines how consumers adjust their financial behavior in response to expected interest rate changes, with paycheck-to-paycheck consumers opting to spend less and avoid credit, while financially stable consumers consider increased investment.

The report also highlights that while security and cost remain top priorities when choosing a financial institution, competitive interest rates are a crucial factor for a majority of consumers, particularly those with greater savings who are strategically seeking wealth growth.

The study underscores the growing need for financial literacy as the interplay between inflation and interest rates continues to evolve, impacting consumers across the financial spectrum.

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