Fact Checked

Fed rate hikes could translate to higher credit card interest charges

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The Federal Reserve is raising the federal funds rate for the second time this year by a quarter of a percentage point.

The federal funds rate is the interest rate that banks pay when they borrow money from other banks. When this rate goes up, the interest rates on your credit cards may follow suit.

The Fed kept the federal funds rate hovering near historic lows, between 0% and 0.25%, for seven years, but has gradually increased the rate seven times since December 2015.

Timeline Federal Funds Rate Target Range
June 2018 1.75%–2.0%
March 2018 1.5%–1.75%
Dec. 2017 1.25%–1.5%
June 2017 1.0%–1.25%
March 2017 0.75%–1.0%
Dec. 2016 0.5%–0.75%
Dec. 2015 0.25%–0.5%
Dec. 2008 0%–0.25%

 

Credit card holders carrying large balances month-to-month are among those who could be hit the hardest. On its own, this recent quarter percentage point hike may have little impact on consumers. But in combination, the 1.75% in increases over the past two and a half years could make things difficult for consumers who are in debt.


What does this mean?

Consumers owed $815 billion in credit card debt in the first quarter of 2018, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data.

So while the quarter percentage point increase in the federal funds rate might sound tiny, it could lead to more than $2 billion in additional interest charges for cardholders overall. And keep in mind, that only represents the most recent interest rate hike, based on the Federal Reserve Bank of New York’s Q1 2018 numbers.

Why should you care?

The increase to the federal funds rate could impact how much interest you’re charged on your credit card.

Of course, whether or not the Fed rate hike means you’ll owe more money on your credit card balance all depends on whether the bank issuing your card raises their prime rate — and with it your interest rate — in line with the hike. And history shows us that many banks raise their prime rates following a Fed rate hike.

So how much extra might you owe if the rate hike trickles down to you? Let’s break it down.

If you had $10,000 in credit card debt with an interest rate of 16.81%, here’s what your situation might have looked like before the fed rate hike.

Credit card balance Interest rate Expected monthly payment Expected number of months to pay off debt Estimated total interest costs
$10,000 16.81% $200 87 months $7,329

 

If your credit card issuer raises your interest rate by a quarter percentage point, here’s what your situation might look like after.

Credit card balance Interest rate Expected monthly payment Expected number of months to pay off debt Estimated total interest costs
$10,000 17.06% $200 88 months $7,578

 

This is just an example, but in this scenario, you’d owe approximately $249 more in interest than before the recent rate increase.

What can you do?

The latest interest rate hike from the Federal Reserve might seem intimidating, but it doesn’t have to — you can actually avoid paying interest charges on credit card purchases if you pay off your balance on time and in full every month. It’s one reason why it’s so important to spend only what you can afford to pay back.

You might also be able to save on interest by applying for a balance transfer credit card or personal loan, but keep in mind that both of these options might require good to excellent credit to qualify for the best rates.


About the author: Tim Devaney is a personal finance writer and credit card expert at Credit Karma. He’s a longtime journalist who prides himself on being a good storyteller who can explain complex information in an easily digestible wa… Read more.