Your credit card debt is probably about to get more expensive—here's why
Your credit card debt is likely to get more expensive if you continue to carry a monthly balance.
The Fed raised interest rates last Wednesday for the 10th time in a row, but indicated that it could be the final one of the year. The Fed increased its benchmark interest rate by 25 basis point, which brought the federal funds rate - the rate that banks charge one another when they lend money - to a range between 5% and 5.25%.
Since March 2022, the Fed has raised interest rates to fight inflation. However, this makes borrowing money more expensive for consumers.
Ted Rossman is a senior industry analyst for Bankrate.com. He told CNBC Make It that the theory behind this is that consumers and businesses will reduce spending when interest rates rise and debt costs increase. This, in turn, will slow down price increases and restrict economic activity.
According to the latest data from the U.S. Bureau of Labor Statistics, despite a slight drop in inflation this March, prices for April are still 4.9% higher than a year earlier.
What impact do Fed rate increases have on credit card debt?
The banks use the federal fund rate to determine the prime rate. This is the rate of interest that they pass on to consumers. It is usually about 3% more than the federal fund rate. According to J.P. Morgan Chase, the rate is currently 8.25%.
It's very rare to receive a card with this interest rate. Rossman says that credit card interest rates tend to be higher because of the costs incurred for the card issuer as well as the risk some cardholders may not pay back their debt.
According to WalletHub’s " Credit Card Landscape Report," the average annual percentage rate for credit cards is currently around 22% for new accounts and 20% for those with existing accounts.
Most credit cards offer variable APRs that can rise or fall in response to changes made in the federal fund rate. Your credit card APR will likely increase by the same amount as your Fed's 0.25 percentage-point increase. If your credit card APR was 20%, then it could increase to 20.25 %.
Rossman claims that you will see the Fed's rate change in a few months.
Credit card debt: Tips to help you manage it
Interest charges can quickly balloon your debt if you carry a balance month-to-month. There are some things you can try. You can tackle your credit card bill in two easy steps.
Contact your credit card issuer
According to LendingTree’s April survey, 76% people have been granted a lower rate of interest on their credit card after asking.
Matt Schulz writes in an April report that these findings show cardholders are more powerful than they think when it comes to fighting high interest rates. This is especially true if you have a good credit rating.
He tells CNBC Make It that "you have nothing to loose, so just pick up the telephone and ask."
Use a high-yielding savings account to boost your savings
Schulz warns: "If you have no savings and pay off all your debt, you will be back in debt when you need to make a trip to the veterinarian or replace a flat tire."
Saving money can help you avoid having to use your credit card for unexpected expenses. A high-yielding savings account will help you get a better return on your investment.
Schulz: "After years with microscopic returns, many high yield accounts offer 4% or even more back." According to the Federal Deposit Insurance Corporation (FDIC), the average interest rate on traditional savings accounts was 0.39% in the last year.
Schulz says that this can help your emergency fund grow much faster than you realize. This is important because a robust saving plan is key to getting rid of debt.