What the Fed’s interest rate hikes mean for your credit cards

Melissa Lambarena

The Federal Reserve announced its sixth rate hike this year, raising rates by three-quarters of a percentage point in a bid to stabilize the US economy.

For consumers, that means “market interest rates for credit cards, car loans and all other loans will go up,” says Ligia Vado, senior economist at the Credit Union National Association.

If you pay your credit card bill in full each month, the latest interest rate hike won’t impact your wallet. But, if you have a large balance on a credit card, payments are about to get more expensive.

Here’s what you need to know.

What to expect for your credit cards

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

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Payments for outstanding balances will increase

With a permanent equilibrium, the minimum payment requirement on your credit card may increase since interest charges may be factored into their calculation. It may take a billing cycle or two to see a change in your statement, depending on the issuer.

Generally, an issuer cannot increase interest rates on new purchases without giving you 45 days notice, but the variable APR on credit cards that is directly impacted by the interest rate increase of the Fed is an exception.

In fact, issuers are not required to notify you at all. This means that the credit card you already have probably has a higher interest rate than before, and you may not have known it.

New credit cards will have a higher APR

If you’re applying for a new credit card or have a 0% APR introductory promotional offer ending, you’ll likely start with a higher base annual percentage rate.

If you’re tempted to open a store credit card this holiday season, avoid carrying a balance, if possible. Exorbitant interest rates can push you into debt.

What you can do to minimize the impact

You can lessen the impact of Fed interest rate hikes by exploring your deleveraging options for current credit cards or by switching your spending to a credit card with a lower interest rate.

Explore your debt repayment options

Interest on credit cards has traditionally been expensive compared to some other loans, regardless of how much the Fed raises interest rates. It is essential to explore your deleveraging options better late than never.

Before you begin, understand how debt is born, says Jen Hemphill, certified financial advisor and host of the “Her Dinero Matters” podcast. This can prevent you from taking on more debt.

Once you’ve identified the reasons why you got into debt and the necessary changes to your spending and budget, you can explore ways to pay off your credit card debt.

A credit card with balance transfer

With good credit (a score of 690 or higher), you may qualify for a balance transfer credit card that facilitates the transfer of high-interest debt from a different issuer at a rate of lower interest.

“You can see it at 0% for, say, 12 months,” says Hemphill. “It can be a money-saving option, but you really have to use it wisely and do some planning.”

Lakeycha Pinckney, a teacher from South Carolina, took this approach when she recently found herself with a balance of around $4,500. When she received a balance transfer offer from her current credit card issuer, she weighed the cost of the fees charged against the amount transferred.

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

“I sat down and did the math,” says Pinckney, who documents his financial journey on his YouTube channel, Keycha Budgets. “In the long run, it’s cheaper to pay the fees than to pay all the interest.”

A fixed rate debt consolidation loan

For debts on several credit cards, a consolidation loan can combine your balances into one fixed rate loan payment, making it easier to manage. Use the money to pay off balances and pay off the loan in installments over a set term. You can qualify for a loan with bad or fair credit (around a score of 689 or less), but lower rates are generally reserved for higher credit scores. Consider the cost of interest and fees to determine if it’s worth it.

A debt management plan

If your debt is going to take three to five years to be paid off, consider meeting with a counselor at a nonprofit credit counseling agency to determine if you qualify for a loan. debt management plan. For a fee, these plans can potentially lower interest rates and waive fees, allowing you to make more headway on debt. If your options are limited due to less than ideal credit or other reasons, it may be worth paying the fee if it saves you money in interest in the long run.

Look for lower interest rates

If you plan to pay off a large purchase over time, save on interest payments with a 0% APR introductory offer for purchases. For outstanding balances on existing credit cards, consider switching your spending to a credit card with a lower interest rate, even if it means not earning rewards. The potential interest savings will far exceed what you can earn in ongoing rewards. And note that the average APR charged for credit card accounts that earned interest was 18.43% in August 2022, according to Federal Reserve data.

Credit unions tend to have lower interest rates on credit cards and debt consolidation loans compared to banks, so you might want to look there as well. In September 2022, the national average rate for a “regular” credit card was 11.64% at credit unions and 13.05% at banks, according to data extracted by the National Credit Union Administration. Federal law also caps the interest rate on loans and credit cards at 18% at federally chartered credit unions. This cap is not impacted by Fed interest rate hikes, according to Vado.

“We are a non-profit organization – we have no shareholders,” Vado explains. “We are owned by our members, so the money we don’t make in profits we redistribute by charging lower interest rates on loans and paying higher returns on deposits and accounts. ‘saving.”

Membership is generally required to join a credit union, but you may qualify depending on where you live or work. Alternatively, some credit unions allow membership with a $5 donation to a partner organization.

Why a debt repayment strategy is essential now

It is important to start reducing your debts quickly to protect yourself against the unknown. By having a plan in place, you can potentially minimize the impact of future Fed interest rate hikes, holiday spending, and a possible recession.

Lenders, including credit unions, have also been known to tighten lending standards if the economy becomes unstable, so debt repayment options may become harder to come by if you wait.