Guide to rising credit card interest rates

Tools, tips for cardholders with revolving debt as APRs go up, up, up

Guide to rising interest rates

With the Federal Reserve's second interest rate increase this year and the seventh in more than two years, credit card rates are expected to rise again, and credit card holders who carry balances can, and should, take actions to minimize the cost.

Since December 2015, the Federal Reserve has raised its benchmark rate in seven 0.25 percent increments, with the most recent rate hike on June 13, 2018.

Whenever the Federal Reserve raises interest rates, your credit card’s interest rate will almost certainly go up. For those who carry a balance, that means higher monthly minimums and higher interest charges. 

Impact on consumers
Even those small raises can hurt some consumers. The credit bureau TransUnion estimates that 92 million Americans are impacted by interest rate increases, and 9 million Americans are already stretched so thin that even a small hike will cause strain. 

FAQs on credit card rate increases

Q: When the Fed raises rates, will my credit card interest rates go up?
A: It’s highly likely. Nearly all general purpose credit cards in the U.S. have variable rates, tied to the prime rate. That, in turn, is tied to the rate the Federal Resere changes – the federal funds rate. Your card agreement says whether your rate is variable and what index it is tied to. If you are not certain, call the 800 number on the back of your credit card and request a copy of your card agreement.

Q: How will my interest rate be affected?
A: Short answer: Your rates will likely increase by the same amount that the Fed raises rates. The longer answer is that changes in the federal funds rate prompt banks to adjust their prime lending rate. Most variable card APRs are linked to the prime rate as published in The Wall Street Journal. The index reflects the prime lending rates posted by seven of the 10 largest U.S. banks. While the Credit CARD Act of 2009 restricts when card issuers can raise rates, one exception to the rule allows them to pass along rate increases if the rates are tied to an index not under their control. That means they can pass through any rate increases from the Fed. In addition to raising rates on existing cards, card issuers also generally increase the rates they charge on new card offers.

Q: How soon will the rate increase take effect?
A:
 According to our research, most issuers will raise rates on the next billing cycle, but a few will wait until the next quarter. The timing of rate adjustments is set in the terms and conditions of your card agreement.

Q: How much will the Fed rate increases cost me on my credit card bill?
A: Whenever the Fed hikes rates a quarter-point, that means an extra $2.50 a year in interest for every $1,000 in variable-rate balances that you carry. For a $5,000 balance, interest costs will rise $12.50 a year, or a little over $1 per month.

Now that you know the situation, here are five ways to reduce the problem of rising interest rates.

5 ways to offset rising card APRs

  1. Pay off, or at least pay down, your balance.
  2. Create a budget and stick to it.
  3. Buy time with a balance transfer.
  4. Lower your interest rate.
  5. Get help to manage debt

 


 

 1. Pay off, or at least pay down, your card balances


 

 

5 ways to cut your card debt as interest rates rise

Charged Up! podcast: Answers to your debt questions

Credit card debt payoff calculator


 

2. Create a budget, and stick to it

 

 

A generic budget: Guidelines for spending categories

7 things you never budget for (but need to)

6 inexpensive financial tools to help you budget and save

Charged Up! podcast: The art of stretching


 

3. Buy time with a balance transfer

 

 

What is a balance transfer? 9 things you should know

Best balance transfer credit cards

Balance transfer: the best way to pay down card debt?

6 steps to a successful balance transfer

Balance transfer card reviews


 

4. Lower your interest rate

 

 

Poll: Most who ask for a rate cut, get one

Credit card debt negotiation in 3 (not) easy steps

Script to ask for a lower credit card rate

Best low interest credit cards


5. Get help to manage debt

 

 

9 things you must know about debt management plans 

Save money and your score with a DIY debt management plan

Debt consolidation: 4 options to streamline multiple debts

When is a debt management plan a sound move?

 


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Updated: 07-18-2018