Guide to rising credit card interest rates
Tools, tips for cardholders with revolving debt as APRs go up, up, up
With the Federal Reserve's fourth interest rate increase this year and the ninth 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 nine 0.25 percent increments, with the most recent rate hike on Dec. 19, 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.
5 ways to offset rising card APRs
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 Reserve 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.
1. Pay off, or at least pay down, your card balances
Side hustles are a great way to increase your income and help you pay off debt faster. If you decide to go that route, though, make sure you're committed to doing what it takes to make a profit. This is especially important if you decide to sell a product that requires an upfront investment.
2. Create a budget, and stick to it
After a stressful day, impulse spending can feel good. But over time, it will lead to increased debt, which will only add to your stress in the long run. Keeping track of your spending – and not going over budget is an important step to take if you're committed to getting out of debt.
3. Buy time with a balance transfer
Transferring your debt to a card with a lower or zero interest rate can help you pay off your debt faster, without having to increase your monthly payments. By cutting the amount of interest you have to pay each month, you'll have more money going toward the principal.
4. Lower your interest rate
Few customers ask their banks for a lower interest rate. But those who do usually get one. By simply asking your bank, you might save on interest without having to apply for a new card with a lower APR.
5. Get help to manage debt
In certain situations, you'll need to outside help to get out of debt in a reasonable amount of time. if you don't think you'll be able to go at it alone, a credit counselor or debt settlement plan can help you.
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