Credit card APRs to rise again as Federal Reserve raises rates for third time in 2018

Another quarter-point hike expected before end of year; projections point to more increases in 2019

Fred O. Williams
Senior Reporter
Expert on consumer credit laws and regulations.

APRs to rise

Credit card interest rates are going up for the third time this year – but probably not the last time – as the Federal Reserve tightens its benchmark rate to head off inflation by raising the rate a quarter point.

Since the rate-setting Federal Open Market Committee last met in August, "the labor market has continued to strengthen and ... economic activity has been rising at a strong rate," according to the committee policy statement on Wednesday Sept. 26.  

In projections released Wednesday, a majority of the rate-setting committee expects to continue raising rates. Another quarter-point hike is highly likely this year, and at least two more are projected for 2019.

Most general-purpose credit cards have variable rates that rise in step with banks' prime rate. Banks set the prime according to the federal funds rate. So increases in the FOMC's federal funds rate are passed on quickly in the form of higher APRs on credit cards. For most cards, the quarter-point extra interest will take effect in the current billing period or the next one.

“With another rate hike in the books and more likely on the way, it’s more important than ever to pay down your credit card debt,” said CreditCards.com industry analyst Ted Rossman. “You can still get a 0-percent balance transfer with no fees for up to 20 months. Take advantage of that. It could save you hundreds or even thousands of dollars.”

See related: Guide to rising credit card interest rates

Cost of higher rates hits credit card users

Rate increases are easy to miss on your monthly credit card statement. But if you carry a balance from month to month, they can have a serious impact on your finances.

  • Today’s increase of 0.25 percent means an additional $12.50 in annual interest on a typical $5,000 card balance.
  • If you pay off the balance over five years, the total interest costs rise by $77. 
  • Annual interest on a $5,000 balance has gone up by $100 as a result of the Fed's eight rate increases since it began tightening in 2015.

"With another rate hike in the books and more likely on the way, it's more important than ever to pay down your credit card debt. You can still get a 0-percent balance transfer with no fees for up to 20 months."

Card interest rates to rise following Fed's announcement

The average interest rate on consumer credit cards that carry a balance is 15.5 percent as of May 2018, the latest figure reported by the Fed's consumer credit report. That's up from 13 percent in 2014. The Fed tracks bank rates charged on "revolving" accounts, which are mostly made up of credit cards.

The Fed's monetary tightening is affecting rates on new card offers as well, according to CreditCards.com's weekly rate report. Applicants have seen the national average APR on card offers rise from 15 percent in 2014 to 16.92 percent as of today.

Economic headwinds to increase for consumers

So far, the strong job market has buoyed consumers. With the jobless rate running below 4 percent, households are in better economic shape than ever, at least according to credit scores. The average FICO score has reached a record high of 704, the analytics company announced this week.

People who carry a balance on credit cards, however, will face higher and higher payments just to keep up as interest rates rise.

"Overall, we expect inflationary pressures to pick up slightly over the coming quarters," TD Bank senior economist Leslie Preston wrote in a research note. That and other factors "support our expectation for a continued gradual pace of rate increases, with hikes looking likely at the September and December meetings."

The FOMC's final meeting of the year is scheduled to conclude on Dec. 19, making it the last chance for another rate increase in 2018.

Although consumers' borrowing costs are going up, they remain at historically below-average levels, Fed Chair Jerome Powell said.

Fed Chair: Borrowing costs remain relatively low

Although consumers' borrowing costs are going up, they remain at historically below-average levels, Fed Chair Jerome Powell said in remarks after the meeting, referring to mortgage rates as well as credit cards and other forms of consumer credit.

The Fed is moving gradually to tap the brakes on the economy in order to head off future inflation without bringing the economic recovery to a halt, Powell said.

A quicker uptick in inflation, which has held roughly at the Fed's 2 percent goal, could trigger faster rate increases. "We don't see that happening – we're watching very carefully," Powell added. People remaining in the labor force despite an aging population may be helping keep wages from fueling inflation.

Trade disputes launched by the White House may result in higher consumer prices as tariffs on imports take effect, Powell said, but a widespread effect hasn't been felt yet.

"The U.S. economy is strong and at a pretty positive moment," he said.


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Updated: 10-17-2018