Credit Cards

How the Federal Reserve Rate Hike Will Affect Your Credit Card Debt

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Interest rates are rising, and experts say you’ll soon feel the effects on your credit card balance.

This week, the Federal Open Market Committee set its target range for fed funds rates at 0.25-0.50%. That marks a quarter percent rise from the near-zero range since the start of the pandemic, and the first rate increase since 2018. The Federal Reserve cited a strengthening labor market and elevated inflation as reasons for the rate hike. , soon affecting everything from mortgage rates to personal loans to credit cards.

Experts say the increase will mean higher APRs and longer debt repayment periods for cardholders. And that’s amid already mounting credit card debt: Between the third and fourth quarters of 2021, credit card balances rose by $52 billion nationwide. The average American credit card balance was $5,525 in 2021.

“It’s very important for people to know that their credit card rate is going to go up,” says Beverly Harzog, credit card expert and consumer finance analyst for US News & World Report. “And if you have credit card debt, it’s time to take steps to get rid of it.”

Here’s how your card accounts may soon be affected and what you can do now to mitigate rising credit card interest rates.

How Interest Rates Affect Your Credit Card APR

The Fed’s decision to raise its target rate is significant for cardholders because the prime rate, which most credit card variable APRs are based on, is pegged to the fed funds rate. When the prime rate goes up, credit card interest rates go up too.

If you pay your balance on time and in full each month, avoiding interest, an APR increase may not mean much.

But if you already have a credit card debt balance, a higher APR can extend the amount of time it takes to pay it off and the total interest you’ll pay during that time, especially if you have less than stellar credit card debt. credit. If your card’s variable APR is between 16% and 24%, you’ll most likely get the lower end of that range if you have excellent credit. If you have a lower score, you can pay the higher end of the variable rate.

What rising interest rates mean for you

New, higher rates will apply to nearly all credit card borrowers within a month or two, Ted Rossman, senior industry analyst at Red Ventures-owned, predicts as NextAdvisor. Each card issuer has slightly different rules about changing the cardholder’s APR, and the increase generally depends on your billing cycle. But you may see a difference as soon as your next return or the next.

As for how much higher your APR will be, don’t expect a drastic change, at least not yet.

Rossman predicts that credit card issuers may raise APRs a bit more than the Fed’s rate hike to offset their own risk, but “I’d say a quarter-point hike isn’t going to make much of a difference.” , it states.

But this latest rate increase won’t be the last. The Fed has already said that it “anticipates continued increases…will be appropriate.”

Today, the average credit card APR is around 16%, but Rossman says more rate hikes this year could push the average credit card interest rate above 18%.

“Get ready for… several rate increases,” says Harzog. “That’s more than enough incentive that you need to start paying down the debt you have, and if you don’t have credit card debt, consider yourself lucky right now.”

Pay off existing debt now

Credit card interest rates are already through the roof, and rising rates just mean it could be harder to pay off your debt. “A year from now, if you’re in debt and making minimum payments, whether it’s 16%, 17%, or 18%, you’re going to rack up a lot of interest,” says Rossman. “It’s likely to get worse.”

A balance transfer credit card is a great tool for paying down your debt. Even if you can’t pay off the balance before the introductory period ends, you can make a big dent in your credit card debt if you’re paying as much as possible each month, says Harzog.

Even small APR increases can result in more debt, which a balance transfer can help offset. For example, let’s say you have an average debt balance of $5,525 on a card with an average variable APR of 16%.

This is a breakdown of how much you’ll pay if you make a minimum 3% payment at your current interest rate over time, compared to how much more you can pay if your rate increases by just 0.25%. You’ll also see the result of using a balance transfer card with a 21-month introductory period and a 3% balance transfer fee, paid before interest is applied.

Current Average APR Current Average APR + .25% Balance transfer paid in full
Monthly payment $165.75 $165.75 $270.99
time to pay 187 months 189 months 21 months
interested payment $4,186 $4,304.10 $0
fees paid $0 $0 $165.75
Amount paid in full $9,711.65 $9,829.10 $5,690.75

Before you begin, create a plan to pay off as much of your balance as you can before the introductory period ends. Review all of your monthly expenses to see how much more you can contribute to your debt.

If you don’t qualify for a balance transfer card, consider seeking help from a nonprofit credit counselor to consolidate your debt and get a lower interest rate.

If neither option works for you, paying off debt the old-fashioned way still works, says Harzog. Optimize your monthly budget to make sure you can spend as much as possible on your balance, looking for ways to cut expenses or increase income, and use a debt-payoff technique like the snowball or avalanche method.

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