How Will the Federal Interest Rate Hike Affect Your Credit Card Payments?
The federal interest rate now ranges from 1.50% to 1.75%, a rate hike of 75 basis points. The Board of Governors of the Federal Reserve System voted unanimously to approve a 0.75% increase in the prime rate, as GOBankingRates reported on June 15.
Typically, banks and credit card providers will raise interest rates by the same amount as the prime rate increase. So consumers can easily expect a 0.75% interest rate increase on their revolving credit card debt. However, if your credit card company didn’t raise rates after the last two prime rate hikes, they could raise interest rates by as much as 1.75% — or even more.
Six months ago, CreditCards.com reported that the national average APR for credit cards was just 16.13%. As of June 15, the national average is up to 16.78%. That is not exactly in line with fed rate hikes to date but, remember, this is only a national average. Some cards saw a greater increase, and some saw smaller hikes.
For instance, consumers with bad credit may have been paying an average of 25.80% in December and are now paying an average of 26.21%, according to CreditCards.com statistics.
Minimum Payments Could Go Up
Depending on how your credit card provider calculates your minimum payment, your monthly payments could go up if your interest rate rises.
Some providers set the minimum payment as a flat percentage – typically 2% – of your outstanding balance at the end of the billing cycle. If this is the case, watch your statement carefully. That minimum may barely cover the interest charges, so you could fall deeper into debt even as you make timely payments every month.
Some providers charge a specific percentage but then add on the interest charges and fees from that billing cycle, according to NerdWallet.com. In that case, your minimum payment will definitely go up, and you may need to recalculate your household budget to find the extra money to make that higher payment.
The Silver Lining?
The good news is that credit card companies must give 45 days’ notice before increasing interest rates or changing fees. That gives you time to prepare.
If you have good credit, you may shop around for one of the best balance transfer credit cards to take advantage of a 0% introductory APR. Or you may take out a home equity loan or do a cash-out re-fi of your mortgage and use the money to pay down high-interest credit card debt.
More than ever, it’s important to avoid using credit cards except in a dire emergency or when you know you can pay your balance in full every month.
More From GOBankingRates