Interest rates are steadily rising, and experts say the effect could hit your credit card balance.
Today, the Federal Open Market Committee increased its target federal funds rate range from 3.75% – 4.00% to 4.25% – 4.50% in the seventh rate increase since March.
The Federal Reserve cited the ongoing effort to bring down runaway inflation as a major factor in its decision — which will, once again, affect everything from HELOCs and home equity loans to the stock market and credit cards.
“The biggest concern I’m thinking about most is loans and interest rates for credit cards,” says Cory Moore, certified financial planner and founder of Moore Financial Planning. Variable interest rates will continue to go up on consumer debt as a direct impact on cardholders.
Experts say the increase will mean higher APRs and longer debt payoff periods. And that’s amid already-growing credit card debt — between the third and fourth quarters of 2021, credit card balances increased by $52 billion nationwide. The average American credit card balance was $5,525 in 2021.
“It’s very important that people are aware that their credit card rate is going to go up,” says Beverly Harzog, a credit card expert and consumer finance analyst for U.S. News & World Report. “And if you do have credit card debt, it’s time to take steps to get rid of that.”
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 increase its target rate is meaningful for cardholders because the prime rate — which most credit card variable APRs are based on — is tied to the federal funds rate. When the prime rate goes up, credit card interest rates do, 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’re already carrying a credit card debt balance, a higher APR can prolong the amount of time it takes to pay it off, and the total interest you’ll pay over that time — especially if you have less-than-stellar credit. If your card’s variable APR is between 16% and 24%, you’re most likely to get the lower end of that range if you have excellent credit. If you have a lower score, you may pay the higher end of the variable rate.
What Rising Interest Rates Mean for You
New, higher rates will apply to almost 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. Every card issuer has slightly different rules about changing cardholder APRs, and the increase usually depends on your billing cycle. But you may see a difference as early as your next statement or the one after.
Today, the average credit card APR is around 16%, but Rossman says more rate increasescould push the average credit card interest rate over 18%.
Ongoing rate hikes, Harzog says, are “more than enough incentive than you need to start paying down that debt you have, and if you don’t have credit card debt count yourself lucky right now.”
Pay Down Existing Debt Now
Credit card interest rates are already sky-high, and increasing rates only means it could get more difficult to pay off your debt. “A year from now, if you’re carrying 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 to pay off your debt. Even if you cannot pay the balance before the introductory period ends, it can put a huge dent in your credit card debt if you’re paying as much as possible each month, says Harzog.
Even small rate APR increases can result in more debt, which a balance transfer can help you offset. For instance, say you have the average $5,525 debt balance on a card with the average 16% variable APR.
Here’s a breakdown of how much you’ll pay if you make a 3% minimum payment with your current interest rate over time, compared to how much more you may pay if your rate increases by 0.75%. You’ll also see the result of using a balance transfer card with a 21-month intro period and 3% balance transfer fee, paid off before interest kicks in.
| Current Average APR | Current Average APR + 0.75% | Balance Transfer Paid in Full | |
|---|---|---|---|
| Monthly payment | $165.75 | $165.75 | $270.99 |
| Time to pay off | 187 months | 193 months | 21 months |
| Interest paid | $4,186 | $4,549.83 | $0 |
| Fees paid | $0 | $0 | $165.75 |
| Amount paid in full | $9,711.65 | $10,074.83 | $5,690.75 |
“The first thing people should do is take an inventory of their debts and pay off any variable interest debt or high-interest debt immediately,” says Denise Downey, a certified financial planner and founder of Financial Trex, a financial planning firm. Keep in mind that some debt has a fixed rate, which means it won’t change despite the Fed’s rate increases. Pay debt that has a variable interest rate as soon as possible because these rates will continue to go up, she says.
Before you start, create a plan to pay as much as you can toward your balance 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. Streamline your monthly budget to ensure you can dedicate as much toward your balance as possible, look for ways to cut expenses or increase income, and use a debt payoff technique like the snowball or avalanche method.
