How the Fed's rate hike will affect your credit card debt
How the Fed’s rate hike will affect your credit card debt

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

This week the Federal Free Market Committee sets its federal funds rate target range at 0.25-0.50%. This represents a quarter percent increase from the near-zero range since the start of the pandemic, and the first rate increase since 2018. Federal Reserve quoted a firming labor market and high inflation are the reasons for the rate hike, which will soon affect everything from mortgage rates to personal loans and credit cards.

Experts say the increase will mean higher APRs and longer debt repayment periods for cardholders. And it’s in the midst of already growing credit card debt – between the third and fourth quarters of 2021, credit card balances increased by $52 billion nationwide. the average US credit card balance was $5,525 in 2021.

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

Here’s how your card accounts could 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 — on which most credit card variable APRs are based — is tied to the federal funds rate. When the preferential rate increases, credit card interest rates also increase.

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

But if you already have a balance of credit card debt, a higher APR can extend the 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. If your card’s variable APR is between 16% and 24%, you’re generally likely to 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, predicts Ted Rossman, senior industry analyst at CreditCards.com, which is owned by Red Ventures, like NextAdvisor. Each card issuer has slightly different rules about changing cardholder APRs, and the increase usually depends on your billing cycle. But you can see a difference on your next reading or the one after.

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 might raise APRs a bit more than the Fed’s rate hike to offset their own risk, but “I’d say a quarter-point hike won’t make a big difference. “, he says.

But this latest rate hike will not be the last. Already, the Fed has said it “expects ongoing increases…will be appropriate.”

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

“Be prepared for…multiple rate increases,” Harzog says. “That’s more than enough to start paying off that debt, and if you don’t have any credit card debt, count yourself lucky right now.”

Pay off existing debt now

Credit card interest rates are already exorbitant, and increasing rates only means that it might become more difficult 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 racking up a lot of interest,” Rossman says. “It’s likely to get worse.”

A balance transfer credit card is a great tool for paying off your debt. Even if you can’t pay the balance until the end of the introductory period, it can significantly reduce your credit card debt if you pay as much as possible each month, says Harzog.

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

Here’s a breakdown of how much you’ll pay if you make a minimum payment of 3% with your current interest rate over time, versus how much more you could pay if your rate only increases 0.25% . You will also see the result of using a balance transfer card with an introductory period of 21 months and a 3% balance transfer fee, refunded before interest kicks in.

Current average APR Current average APR +0.25% Balance transfer paid in full
Monthly payment $165.75 $165.75 $270.99
It’s time to pay 187 months 189 months 21 months
Interest paid $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 as much of your balance as possible before the introductory period ends. Review all of your monthly expenses to see how much 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, old-fashioned debt repayment still works, says Harzog. Streamline your monthly budget to ensure you can spend as much as possible on your balance, looking for ways to reduce expenses or increase income, and use a debt repayment technique like the snowball or avalanche method .

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