Impact of Fed Rate Hike on Credit Cards

The Federal Reserve announced its sixth interest rate hike this year in an effort to stabilize the US economy.

For consumers, this means “higher market interest rates for credit cards, auto loans and everything else,” says Lijia Vado, senior economist at the National Credit Union Association.

Pay off your credit card bills in full every month so the latest interest rate hike won’t hit your wallet. However, if you have a large ongoing balance on your credit card, payments will be more expensive.

Here’s what you should know:

what to expect from a credit card

Whether you’re buying a new credit card or managing your current one, expect the Fed’s latest rate hike to increase your annual credit card rate.

More recurring balance payments

If you have an ongoing balance, your credit card minimum payment requirements may increase as the method of calculation may include interest. Depending on the issuer, he may take 1-2 billing cycles for the changes to appear on his statement.

Generally, issuers cannot increase interest rates on new purchases without 45 days’ notice, with the exception of credit card floating APRs, which are directly impacted by Fed rate hikes.

In fact, the issuer doesn’t need to notify you at all. This means that the credit cards you already have may have higher interest rates than they used to, and you may not be aware of them.

New credit cards have higher APRs

If you’re applying for a new credit card or have a 0% introductory APR promotional offer that’s ending, you’re likely starting at a higher baseline annual rate.

If you want to open a store credit card this holiday season, avoid carrying a balance if possible. Very high interest rates can push you into debt.

What You Can Do to Minimize Impact

You can mitigate the impact of a Fed rate hike by considering your current credit card debt repayment options or by switching your spending to lower interest rate credit cards.

Explore Debt Repayment Options

Credit card rates have traditionally been higher than other loans, no matter how much the Fed raises them. It is important to consider options for getting out of debt sooner or later.

Jen Hemphill, certified financial counselor and host of the podcast “Her Dinero Matters,” says understand how debt arose before you begin. It may prevent you from piling up more debt.

Once you’ve identified why you’re in debt and what changes you need to make to your spending and budget, you can consider ways to pay off your credit card debt.

direct debit credit card

If you have good credit (score of 690 or above), you may be able to take advantage of a balance transfer credit card that allows you to easily transfer high interest debt at lower interest rates from another issuer.

“We can be at 0% for, say, 12 months,” says Hemphill. “It can be a money-saving option, but it really needs to be used wisely and planned.”

South Carolina teacher Leiccha Pinckney recently took this approach when her balance was about $4,500. When she received a balance transfer offer from her current credit card issuer, she weighed the cost of the fees charged for the transferred amount.

The ideal balance transfer card should have no annual fee, a balance transfer fee of 3% or less, and a long interest-free period to pay off the debt.

“I sat down and calculated,” says Pinckney, who chronicles her financial journey on her YouTube channel Keycha Budgets. “In the long run, it will be cheaper to pay the fees than pay the full interest.”

fixed rate debt consolidation loans

If your debt is spread across multiple credit cards, a loan consolidation can make it easier to manage by combining your balances into one fixed-rate loan payment. Use money to pay off the balance and repay the loan in installments over a set period of time. You may qualify for a loan with bad or fair credit (a score of roughly 689 or less), but lower interest rates are usually reserved for higher credit. Consider the cost of interest and fees to decide if it’s worth it.

debt management plan

If it will take you three to five years to pay off your debt, talk to a counselor at a nonprofit credit agency to determine if you qualify for a debt management plan. Although paid, these plans may lower interest rates and waive fees, so you can take your debt further. If your options are limited by less than ideal credit or for other reasons, it may be worth paying the fee if it saves you interest in the long run.

ask for low interest rates

If you plan to pay off big purchases over time, you can save interest payments with our 0% Introductory APR offer on your purchase. For ongoing balances on existing credit cards, consider switching spending to a lower-interest credit card, even if you don’t get rewards. The potential savings in interest far exceed what you’ll get with ongoing rewards. The average APR delivered was 18.43%.

Credit unions tend to have lower interest rates on credit cards and debt consolidation loans than banks, so check that out as well. According to data extracted by the National Credit Union Administration, the national average rate for “classic” credit cards in September 2022 was 11.64% for credit unions and 13.05% for banks. Federal law also limits interest rates on loans and credit cards at federally chartered credit unions to 18%. According to Vado, this cap will not be affected by his Fed rate hikes.

“We are a non-profit organization. We have no shareholders,” says Vado. “Because we are owned by our members, we redistribute non-profitable money by charging lower interest rates on loans and paying higher yields on deposits and savings accounts.”

Membership is usually required to join a credit union, but you may be eligible depending on where you live or work. If not, some credit unions allow you to join with a $5 donation to a partner organization.

Why Debt Repayment Strategies Matter Now

It’s important to start reducing your debt immediately to protect yourself from the unknown. Planning can help minimize the impact of future Fed rate hikes, holiday spending, and potential recessions.

Lenders, including credit unions, have also been known to tighten lending standards when the economy becomes unstable, so waiting can make it harder to secure debt service options.

An article about the impact of Federal Reserve interest rate hikes on credit cards originally appeared on NerdWallet.