The Federal Reserve’s job is to cool demand and lower inflation. And yes, you are going to face higher interest rates on your credit cards as a result.
Fed rate hikes tend to trickle down to credit card holders within a month or two. If the Federal Reserve makes its first move to raise short-term rates at its next policy meeting in mid-March, as some expect, you could be looking at a credit card rate hike as early as April or May.
“Card issuers have some flexibility, especially with new customers, but credit card rates generally track the federal funds rate very closely,” said Ted Rossman, senior industry analyst for CreditCards.com and Bankrate.com.
Most consumers already know that it is not cheap to borrow by removing plastic. Or by swiping the credit card app on your smartphone.
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Rising interest rates should prompt credit cardholders to act
Upcoming rate hikes should give consumers one more reason to pay off high-cost credit card debt and limit the amount they are willing to borrow by tapping into a line of credit on a credit card.
The average credit card rate is 16.13%, according to data from CreditCards.com. Credit card rates vary depending on your credit history, with people with lower credit scores paying higher interest rates on their credit cards.
“Credit card debt is already very expensive and will likely get even more so in 2022,” Rossman said.
Credit card spreads have already increased, he said. For example, he said, the current average of 16.13% is 12.88 percentage points above the prime rate, which is close to a record high. The prime rate is now 3.25%.
In 2010, the average credit card rate was 10.89 percentage points above prime. The prime rate was then also 3.25%.
Today, most credit cards do not offer fixed rates. These are variable rates that rise or fall when short-term interest rates rise or fall.
“The high end — what people with lower credit scores pay — averages around 24%,” Rossman said.
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Annual percentage rates, for example, for a Barclays AARP Travel Rewards Mastercard range from 16.74% to 20.74% to 25.74%, depending on your creditworthiness. An introductory APR of 0% is offered for 15 months on balance transfers made within 45 days of account opening. The balance transfer fee is $5 or 5% of each transfer amount, whichever is greater.
The new GM Rewards My Card has an introductory rate of 0% for the first nine months only. After this introductory rate, the annual rate on the card will vary from 14.99% to 24.99%, depending on your credit score. Interest rates are variable and may increase or decrease in the future based on changes in the prime rate.
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How much more will it cost to borrow with a credit card?
If some forecasts are correct, the Fed could raise short-term rates by a quarter of a percentage point up to four times or more in 2022. This means that credit card interest rates could eventually rise in average to around 17% or higher by the end of the year.
Those with lower credit scores could be looking at rates of 25% or more on average by the end of the year.
It’s not a huge extra cost to borrowers, but it’s extra money being spent. And some borrowers may want to reconsider how much they use their credit cards if they don’t pay the full bill each month.
The minimum monthly payment would increase by $4 per month – or $48 per year – if someone sees their rate drop from 16.13% to 17.13% and has a balance of around $5,525 on their credit card .
“The real problem is that credit card rates are already very high,” Rossman said.
If someone has an average rate of 16.13% right now, just making minimum payments would keep someone in debt for 194 months, or just over 16 years.
And the consumer in this example would end up paying $6,160 in interest if they had $5,525 in credit card debt at 16.13%
At 17.13%, it would take a consumer 197 months to pay off their debt on only minimum monthly payments and the overall interest cost would be $6,577, or an additional $417, which would represent an increase nearly 7% of the cost. interest for many years if you only make minimum payments.
Here are some options consumers can consider:
Are there any rates left at 0%?
The 0% introductory offer: Some credit cards continue to offer a 0% introductory offer or a 0% balance transfer offer, even as the Fed is about to raise rates.
A balance transfer can help you pay off your debts while the 0% rate remains in place, say for nine months, 15 months or even up to 21 months in some cases.
A long offer of 0% over 21 months is offered on Wells Fargo Reflect, Citi Simplicity and Citi Diamond Preferred cards, according to CreditCards.com.
After the 0% promo, Wells Fargo Reflect charges 12.99% to 24.99%, Citi Simplicity charges 14.74% to 24.74%, and the Citi Diamond Preferred charges 13.74% to 23.74% currently.
Many consumers may be confused and mistakenly believe that they would be forced to pay a higher rate on all of their debt if they did not pay off the entire balance when the 0% rate is offered, according to a LendingTree survey.
This is often the case with deferred interest programs, such as when you open a credit card to buy furniture or cover a medical procedure. Interest is applied retroactively to the total amount of your original purchase, even if you only leave one dollar unpaid when regular rates reach deferred interest rates.
But consumers won’t be charged interest retroactively if they don’t pay off their card balance in full while a 0% balance transfer rate is in place. You only owe the highest rate on the remaining balance.
Sometimes the 0% transfer rate only applies to balance transfers made within the first 60 days or the first 120 days of account opening. Pay close attention to the different rules in place.
You also generally need to have good credit to qualify for 0% limited offers, such as a FICO score of 670 or higher.
Also watch out for balance transfer fees. Some cards have an introductory balance transfer fee of 3% or 5%. You could pay between $150 and $250 to transfer a balance of $5,000. But it could be worth it if you make sure you pay off a good chunk of the debt during the 0% offer before rates go up.
You are often required to make a minimum monthly payment each month while the 0% introductory rate applies. This is usually based on 1% of your balance.
“Let’s say you owe $5,000 and you only make minimum payments of 1% of the balance each month,” Rossman said.
“You still owe $4,049 at the end of those 21 months. And then the interest rate could skyrocket.”
To truly pay off your debt, you need to make far more than the minimum payment during the 0% period.
Another warning: if you miss a payment, it is possible with some cards that the 0% rate will no longer be offered to you and that you will face much higher rates sooner than expected.
Should I try to get a personal loan?
Learn about low-cost personal loans: Personal loans are available from banks, credit unions and online lenders and some offer rates as low as 2.5% to 5.99% APR.
Many consumers turn to these loans to consolidate their credit card debt and benefit from lower rates.
But unlike a credit card, you will have to repay a personal loan for a set period of time, so the monthly payments would be higher than for a credit card.
One offer said that at 5.99%, you would pay nearly $24 per month for every $1,000 borrowed for 48 months. Payments are the same each month, based on a fixed interest rate and a fixed repayment schedule.
But here’s the thing, higher rates are charged to those with lower credit scores. Some personal loans on the market can now range from 20% to nearly 36%. The current average is around 10.28%, according to Bankrate.com. And you have to factor in the cost of fees; some have a fee, some don’t.
Rossman noted that origination fees are common, ranging from nothing to 8% of the amount borrowed.
You would try to improve your credit score before you borrow by making sure you pay your bills on time and avoid borrowing too much on your credit cards, keeping outstanding balances below 30% of your limit total credit.
What if I feel like I can never get out of debt?
Speak to a nonprofit financial advisor: Check your credit card statement to find out how to contact a credit counseling service. Some statements offer a number that will give you contact information for various services.
GreenPath Financial Wellness, a nonprofit counselor based in Farmington Hills, Michigan, provides details of its services at www.greenpath.org. Or you can call 800-550-1961 Monday through Friday, 9 a.m. to 5 p.m. EST. Offices are currently closed for in-person visits.
The first rate hike by the Fed should be modest. But borrowers should take into account that further rate hikes are likely and borrowing costs will rise.