Does the Fed interest rate hike affect your credit card bill?
The Fed has been increasing interest rates aggressively over the past year making borrowing more expensive. Here’s what it means for your credit card.
The Federal Reserve has raised interest rates nine times over the past year taking them from 0.25 percent to 5 percent over twelve months. Policymakers are expected to bump up borrowing costs once more on Wednesday with experts predicting a quarter percentage point increase.
The US central bank’s monetary tightening is intended to slow the pace of rising prices by cooling the US economy via getting people and businesses to spend less. While higher interest rates will make it costlier to borrow for purchasing a home, a car or anything else, one of the places where most Americans will see the effect of the Fed’s rate hikes is on their credit card bill if they carry a balance.
You might be interested in: What happens if you are late on a credit card payment?
Does the Fed interest rate hike affect your credit card bill?
The effective federal funds rate the US central bank sets doesn’t directly determine how much interest you are charged for your credit card debt but it may affect the variable rate on your credit card. When the Fed raises its target rate it increases the “prime rate” that banks apply to your credit card debt. Along with your credit score and other factors, the prime rate is used to determine the Annual Percentage Rate, or APR, you’re charged on your credit card.
Over the past year, the average APR nationally has gone from 16.34 percent in March 2022 to around 20 in mid-March 2023 according to Bankrate. As the Fed continues to raise rates, variable interest rates will continue to rise. Experts, as of April, don’t discount the possibility of more rate hikes when policymakers meet in June and July and are predicting that the US central bank won’t cut rates before the end of the year.
What should credit card holders do?
If you carry a balance on your credit card, increasing variable rates mean that you will pay more on that debt. So you should look into managing your credit card balance or balances more carefully. You should look into paying off the balance on your credit card with the highest interest rate first if you have more than one.
You might be interested in: Consumer debt payment: What are the snowball method and the avalanche method?
If you expect to take a long time to pay off your credit card debt you might want to consider ways to consolidate it so that you can pay a lower interest rate. You might want to look into transferring your balance to another credit card that offers a zero percent balance transfer offer. You may also want to consider getting a personal loan or a home-equity loan to pay off your credit card balance if you will get a better interest rate.