Cardholders spared APR increase for now

Fed keeps interest rate increase on hold, lowers expectations for future hikes


Credit card holders were spared higher APRs on Wednesday, as the Federal Reserve decided to keep its rate increase campaign on hold for now.

The Federal Open Market Committee voted to keep its benchmark federal funds rate at a range of 0.25 percent to 0.50 percent, the range that was set in December.

Although the job market is improving, "global economic and fiancial developments continue to pose risks," the committee's official policy statement said.

Banks adjust their prime rate in step with the federal funds rate, triggering changes in the APRs on variable rate credit cards. When the Fed hiked its rate in December -- the first increase since 2006 -- rate increases on most general purpose cards followed shortly.

The Fed says it will continue to gradually raise short-term rates to a more normal level of about 4 percent. Just how gradually the hikes play out is a pocketbook issue for cardholders: Each quarter-point increase adds about $1 a month in interest costs for the average person's card balance of $5,200.

Projections released with the Fed committee's statement Wednesday signal that two quarter-point rate increases are likely this year. According to the graphic "dot plot" that depicts where committee members expect rates to go, a majority of FOMC members expect the federal funds rate to be 0.50 percent higher at the end of 2016. By the end of 2017, they expect the rate will be 1.5 percent higher.

If the majority's projection holds true, the APRs on card balances will rise 0.5 percent in 2016,  slowing the pace the FOMC projected in December 2015.  However, many economists  expect the Fed will raise rates less quickly than that amid mixed signals from the economy. "The  gap between what the dot plot suggests and what the Fed actually does has been large," economist Diane Swonk noted in a blog post.

Paying more and more interest to carry a given card balance obviously isn't a winning financial strategy. For some borrowers, higher APRs can increase the size of their minimum payment, card issuers warn. Credit counselors say to take advantage of the lag time before rates rise further.

"You want to have a plan in place to effectively manage and pay down that debt," said Tara Alderete, director of education at Atlanta-based Clearpoint Credit Counseling Solutions. "If you're someone who's carrying a hefty balance on credit cards, our advice would be to get a budget in place … [to] eventually pay off that debt."

Avoiding interest rate hikes by transferring balances to a 0-percent card can be alluring, Alderete said, but be mindful of the fine print. "It looks like, 'Oh wow, 0 percent,' " she said, "but make sure you know the terms, because after a certain number of months, that 0 percent goes up."

People who struggle to meet minimum payments and don't have the credit to qualify for a balance transfer might be candidates for a workout plan sponsored by a nonprofit consumer credit counseling service, said Natasha Bishop, director of strategic alliance and business development at Columbus, Ohio-based Apprisen credit counseling. The program, called a debt management plan, offers budgeting help and potentially reduced interest rates for debtors who agree to close their accounts and make monthly payments.

"The temptation of keeping the cards can also be a motivating factor," she said, "because you're required to close the cards."

Economic headwinds

The Fed is raising rates to keep the economy from overheating as the chill of the Great Recession fades away. The trick will be easing off the accelerator without slowing things down so much that companies start laying people off again and consumers stay home from stores.

"The U.S. economy has been very resilient in recent months, in the face of shocks,", Federal Reserve Chair Janet Yellen said in remarks following the policy announcement. Growth slowdowns in China and other big trading partners have rattled stock markets and pushed up the value of the dollar, making it harder to export U.S. goods.

The jobless rate for February was 4.9 percent, slightly better than the 5.0 percent rate in December, when the Fed launched its monetary tightening campaign. Other indicators are not as robust, however, with inflation continuing to lag the Fed's target of 2.0 percent annual price increases -- the level associated with a healthy economy.

Yellen said she was surprised that wages -- a contributor to inflation -- have not risen more strongly as the economy has warmed up. "The fact that we haven't seen more pickup in wages is a factor showing slack in the labor market," she said.

See related: Coverage of previous FOMC meeting in January

Published: March 16, 2016

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