How Will Credit Card Interest Be Impacted by the Fed Raising Rates?
In an effort to drive down inflation, the Federal Reserve signaled that it will raise interest rates in March. Rate hikes could result in rising variable-interest debt, such as credit cards, which tend to rise by the same amount as Fed increases.
Credit card interest rates are partially based on banks’ prime rate, which moves with the Fed rate. According to the Associated Press, this could particularly affect those who don’t qualify for low-rate credit card offers and may end up paying higher interest rates on their outstanding balances.
“Credit card debt is already very expensive and it will probably become even more costly in 2022,” Ted Rossman, senior industry analyst for CreditCards.com and Bankrate, told USA Today.
If the Federal Reserve raises short-term interest rates in mid-March, there could be higher credit card interest rates as soon as April or May. “Card issuers have some flexibility, particularly with new customers, but credit card rates typically track the federal funds rate quite closely,” Rossman added.
Rossman noted that credit card margins have already been going up. For example, he said that the 16.13% average is 12.88 percentage points above the prime rate, which is close to a record-high.
According to USA Today, the Fed could raise short-term rates by a quarter of a percentage point four times or more in 2022. This could result in interest rates on credit cards going up to an average of 17% or higher. Those with lower credit scores could see rates of 25% and up by the end of the year.
These potential rate hikes could push more consumers to take action by paying off higher interest credit card debt and limiting how much they borrow.