On Wednesday, September 21, the Federal Reserve raised its benchmark federal funds rate by 0.75% โ the third time in a row it has done so.
This move lowers the current Fed rate in the 3.0% – 3.25% range. Furthermore, the Fed has signaled more rate hikes that will raise the fed funds rate to between 4.0% and 4.50% by the end of 2022.
Higher interest rates – current and future – all have a significant impact on consumer borrowing rates with regard to the major issues of mortgages, auto loans and personal loans.
In particular, though, the biggest immediate impact of higher Fed rates may be on credit card interest rates.
Currently, the average credit card interest rate is 21.59%, according to LendingTree monthly interest rate credit card tracker. This is already the highest card rate since 2019, when the company began monitoring credit card interest rates.
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There is a close relationship between Federal Reserve interest rates and credit card interest rates.
โCredit card rates are affected by Federal Reserve rates, so consumers can expect an increase in their bills over one or two billing cycles, and new credit card accounts can expect higher rates upon enrollment,โ said Money Plug, LLC certified financial education teacher Marcia Brown.
Credit card companies have some discretion over how much to raise card rates, but the higher cost of borrowing will be a fact of life in the future for credit card customers when rates go up.
โCredit cards that offer a variable rate will be affected by the Federal Reserveโs increase in the federal funds rate,โ said Brian McCall, Director of Portfolio Management at Fiserv. โAlmost all variable rate cards are tied to the prime rate (plus the margin), so when the prime rate increases (or goes down), it will affect the variable rates.โ
“With the Fed’s move this week, interest rates on floating-rate cards will rise by 0.75%,” McCaul noted.
From now on, each credit card issuer determines how quickly they can implement the rate change based on their own policies and procedures. โIt usually takes effect after the next data cycle has occurred,โ McCall said.
Don’t worry, but pay your card bills on time
Even with higher interest rates, credit cards are still a very good way to conduct transactions, but only if you are a financially responsible consumer.
This means not buying more than you can afford and paying off your credit card balance on time and in full each month,โ Bill Hardikopf, Senior Analyst at MoneyCrasher.com. Because you pay the balance in full.”
Once you establish a pattern to pay your monthly card bills on time, you will immediately begin to take advantage of the myriad of benefits that credit cards bring to the table.
“The advantages of using a credit card are huge,” Hardikopf said. โCards offer a great accounting system for where you spent your money, you can earn rewards with most credit cards, you use bank money for a certain amount of time, and there is stronger protection against credit card fraud than other forms of transaction.โ
However, if you are inclined to balance, an increase in federal interest rates can be very harmful from the point of view of the family budget going forward.
โIn this scenario, avoid making any future purchases with your card, as this will only add to the existing card balance and increase your credit card debt,โ Hardikopf told TheStreet. “Just put your card away and do your best to pay off your balance as quickly as possible.”
If you have balances on multiple cards, pay off the card with the highest interest rate first from now on for the best immediate impact on credit card costs.
“You can also make micropayments, where you make small payments throughout the month to help reduce that balance,” Hardikopf added.
For example, if your family is planning to go to a movie and dinner and spend $75 that night, stay home instead and order a pizza and rent a movie for $25. “Then, take that $50 savings and go online to pay your credit card balance $50,” Hardikopf added. “After all, every little bit helps.”
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