Rising interest rates This means that your monthly credit card payments could rise sharply this year as annual percentage rates increase, increasing the time it takes to pay off balances.
According to the Federal Reserve, 84% of Americans have at least one credit card, and half of them carry a balance from month to month.
ABC News chief business correspondent Rebecca Jarvis explains what consumers need to know.
Editor’s note: Jarvis’ answers have been edited for clarity.
As the Fed raises interest rates in its attempt to control inflation, how is credit card debt affected?
Jarvis: It affects everyone. If you carry a credit card balance from month to month, that means you’re going to pay more every time the Fed raises interest rates. With each rate increase, credit card APRs (annual percentage rates) increase, so you might even see the latest rate increase appear in your current billing cycle.
Give us an example. How much is this going to cost people?
Jarvis: It has a significant impact. Let’s say you have an average credit card balance of $5,525 and are paying 20% APR. If you only make minimum payments, around 2% of the balance, it will take you over 58 years to pay off your credit card. It will cost you almost $24,750 in interest.
If the APR goes to 21%, it will take 76 years to pay off that same balance, costing you over $34,400 in interest.
How can cardholders prevent this scenario from becoming a reality?
Jarvis: Because we know the rates are going up, it will only get more expensive.
The first thing you can do: stop taking on new credit card debt. Set a budget and use any available income to pay off your debt.
Focus on bigger monthly payments. The difference between $50 in interest on your monthly bills and $100 on your monthly bills can mean years and thousands of dollars in interest.
What about transferring your balance to a zero% APR card?
Jarvis: It can work, but there can be a lot of caveats. First, you must qualify. Then you need to make sure the benefits outweigh the costs. Many cards charge a balance transfer fee of around 3%.
Finally, and above all, this cannot be an incentive to take on more debt. Zero-rate APR lasts for a set period of time, usually a year or two maximum, so cardholders must continue to make payments on time.
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