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Credit card APRs heading upward again as Fed hikes rates

Summary

The Federal Reserve voted to raise its federal funds rate by a quarter point for the fourth time this year – all but ensuring credit card APRs will soon climb to a new record.

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Credit card APRs heading upward again as Fed hikes rates

The Federal Reserve voted Wednesday to raise its federal funds rate by a quarter point for the fourth time this year – all but ensuring credit card APRs will soon climb to a new record.

It’s the Fed’s latest move to normalize interest rates and keep inflation in check amid a strong economy. The unemployment rate is 3.7 percent as of November, a month in which the U.S. added 155,000 jobs and wages grew by 0.2 percent. The rate hike was announced during the Dec. 18-19 meeting of the rate-setting Federal Open Market Committee.

In a Dec. 19 news conference, Fed Chairman Jerome Powell noted that the U.S. economy has “continued to perform well,” with low and stable inflation and a job gains pace that will keep unemployment falling. However, he said the Fed sees signals of “softening” since the last time the FOMC raised rates in September, including slower global growth and financial market volatility.

Powell also noted the FOMC adjusted its projected number of rate hikes in 2019 from three to two, on the expectation that economic growth will be slower next year than it was this year.

“Today’s rate hike was widely expected, but the language of the statement and the economic outlook is what everyone was really waiting for, specifically how the Fed would incorporate the market downturn and softer inflation readings into their outlook,” TD Economics senior economist Leslie Preston said in a Dec. 19 research note. “The answer is pretty clear: The outlook is weaker, and on balance the Fed expects to raise rates fewer times than they did back in September.”

Chairman Powell also noted the FOMC adjusted its projected number of rate hikes in 2019 from three to two, on the expectation that economic growth will be slower next year.

Card APRs already at record highs

Banks and card issuers generally set variable card APR ranges based on the prime rate, which is determined by the federal funds rate. So, when the federal funds rate rises, card APRs typically follow suit within the ensuing days and weeks. A quarter-point rate hike is usually reflected in a card’s current billing period or the next one.

The average credit card APR rose to 17.21 percent prior to the Fed’s announcement, according to the CreditCards.com Weekly Credit Card Rate Report. It’s the highest average rate since CreditCards.com began tracking card APRs in 2007. But many cardholders are now qualifying for APRs above 20 percent – the average median card interest rate is now 20.88 percent.

See related: Guide to rising credit card interest rates

The newest rate hike underscores how critical it is to avoid carrying a credit card balance.

  • The quarter-point increase adds $12.50 in annual interest to a $5,000 card balance.
  • Your total interest costs rise by $77 if you pay the balance off over five years.
  • Annual interest on a $5,000 balance has risen by $112.50 since the Fed began raising interest rates in December 2015.

The Fed embarked on a steady pace of rate hikes in December 2015, when interest rates were still at zero as a result of the 2008 financial crisis. Today’s quarter-point rate increase brings the federal funds rate range to 2.25 to 2.5 percent.

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Credit Card Rate Report Updated: September 23rd, 2020
Business
13.91%
Airline
15.48%
Cash Back
15.94%
Reward
15.78%
Student
16.12%

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