Will my card’s interest rate go up, due to the Fed’s rate increase?

Putting card in walletThe Federal Reserve raised the federal funds rate by 0.25 percentage point on Dec. 14. Here’s what that means for your credit cards.

1. Expect your APR to increase

The federal funds rate is the interest rate at which financial institutions (like banks) lend to each other.

Even with the 0.25 percent increase, that rate is still historically low, since the Fed slashed the federal funds rate to nearly nothing back in 2008. However, if banks have to pay even an incremental amount more to borrow, so will you.

When it comes to credit cards, your APR is based on what’s called the “prime rate,” the rate that banks charge their prime customers (their best customers, the kind who are expected to pay off their debts on time). Each bank has its own prime rate. And if you’re not prime, expect the bank to add a few percentage points on top of its prime rate for you.

Prime rates for credit cards are not fixed. If you look at your card’s fine print, you’ll see your APR referred to as “variable.” That means the interest rate on your card fluctuates with the federal funds rate, following it up and down while hovering a few percentage points above it. Typically, the prime rate is 3 percentage points above the federal funds rate.

So, if the federal funds rate goes up, so will your card’s APR. You can expect these changes to filter in over the coming weeks (a few of our issuing partners have already adjusted their APRs up by around a quarter of a percentage point). But rates are still historically low, and borrowing is still relatively cheap.

2. Avoiding interest becomes more important

Growing APRs will be more of an issue for those with large balances. If, say, you have a $10,000 credit card balance at 20 percent APR that you pay off over the course of a year, you’ll pay $1,117 in interest, assuming you don’t charge anything else to your card. If the APR is bumped up to 20.25 percent, you’d pay $1,130 in interest. That’s a relatively small increase.

However, if you have larger balances, carry them for a longer period of time and continuously add additional purchases, your increased interest costs will snowball.

So, avoiding interest will become more important (although it’s always been important). Aside from the obvious advice of “pay off your debt,” consider pursuing a 0 percent balance transfer offer to ease the burden. When you’re paying no interest, all the money you throw at your card will go toward your debt.

If you plan to carry balances regularly (and don’t want to balance-transfer hop from card to card), reconsider the types of cards you are using. Rewards credit cards tend to have high APRs that cancel out the value of the rewards and benefits anyway. So look into getting a no-frills card whose foremost feature is a low interest rate:

Updated Dec. 19, 2016

 
Comments
The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

No comments yet.