What Fed Interest Rate Hikes Mean for Your Credit Cards

Melissa Lambarina

The Federal Reserve announced its sixth rate hike this year, by three-quarters of a percentage point, in an attempt to stabilize the U.S. economy.

For consumers, that means “market rates on credit cards, auto loans and all other loans will go up,” said Ligia Vado, senior economist at the National Association of Credit Unions.

The latest rate hike won’t affect your wallet if you pay off your credit card bills in full each month. However, if you have a large ongoing balance on your credit card, the payments will become more expensive.

Here’s what you need to know.

What to expect from your credit card

Whether you’re buying a new credit card or managing an existing one, expect the latest rate hike from the Federal Reserve to boost your credit card’s APR.

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Payments for ongoing balances will increase

With an ongoing balance, the minimum payment requirement for a credit card may increase as interest charges may affect how it is calculated. Depending on the issuer, it may take one to two billing cycles to see changes on your statement.

Generally, issuers cannot increase the interest rate on new purchases without giving you 45 days’ notice, with the exception of variable APR on credit cards that are directly affected by the Fed’s rate hike.

In fact, the issuer does not need to notify you at all. This means that the interest rate on the credit card you already carry may be higher than before, and you may not realize it.

APR will be higher on new credit cards

If you’re applying for a new credit card or the 0% introductory APR promotional offer is ending soon, you may start with a higher base APR.

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If you want to open a store credit card this holiday season, try to avoid carrying balances as much as possible. Sky-high interest rates can leave you in debt.

What you can do to reduce the impact

You can mitigate the impact of Fed rate hikes by exploring debt repayment options on your current credit card or by switching your spending to a credit card with a lower interest rate.

Explore your debt repayment options

Credit card interest has traditionally been expensive compared to some other loans, no matter how much the Fed raises rates. It is critical to explore options for getting out of debt early on.

Before you start, though, understand how debt is created, says Jen Hemphill, an accredited financial advisor and host of the “Her Dinero Matters” podcast. It may prevent you from adding more debt.

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

balance transfer credit card

With good credit (690 points or higher), you may be eligible for a balance transfer credit card that helps transfer high-interest debt from a different issuer onto this card for lower interest rates.

“You can see some at 0 percent, say 12 months,” Hemphill said. “It might be an option that can save you money, 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 discovered that she had a balance of about $4,500. When she got a balance transfer quote from her current credit card issuer, she weighed the cost of the fee charged for the amount to be 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.

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“I sat down and figured it out,” said Pinckney, who chronicles her financial journey on her YouTube channel, Keycha Budgets. “In the long run, paying the fee is cheaper than paying all the interest.”

Fixed Rate Debt Consolidation Loans

For debts that span multiple credit cards, a consolidated loan can combine your balances into one fixed-rate loan payment, making it more manageable. Use the money to pay off the balance and repay the loan in instalments over a set period. You may qualify for a bad credit or fair loan (with a rough score of 689 or lower), but lower rates are usually reserved for higher credit scores. Consider the cost of interest and fees to determine if it’s worth it.

Debt Management Plan

If your debt will take three to five years to pay off, consider meeting with an advisor at a nonprofit credit counseling agency to determine if you qualify for a debt management program. For a fee, these plans may lower interest rates and waive fees, allowing you to make more progress on your debt. If your options are limited by poor credit or other reasons, it may be worth paying the fee if it saves you interest in the long run.

seek lower interest rates

If you plan to pay off a large purchase over time, use the 0% APR introductory purchase offer to save on interest. For ongoing balances on existing credit cards, consider switching your spending to a credit card with a lower interest rate—even if that means not earning rewards. The potential interest savings will far outweigh what you can get from your ongoing rewards. Note that the average APR charged on interest-earning credit card accounts in August 2022 was 18.43%, according to the Federal Reserve.

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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 too. In September 2022, the national average interest rate on “classic” credit cards 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 interest rates on loans and credit cards at federally chartered credit unions at 18 percent. Vado said the cap is not affected by the Fed raising interest rates.

“We’re a nonprofit — we don’t have shareholders,” Vado said. “We are owned by our members, so we don’t provide profit money, we redistribute it by charging lower interest rates on loans and paying higher yields on deposits and savings accounts.”

Membership is usually required to join a credit union, but depending on where you live or work, you may be eligible. If not, some credit unions allow $5 donations to partner organizations.

Why Debt Repayment Strategies Matter Now

It is important to start reducing debt quickly to guard against the unknown. By creating a plan, you can minimize the impact of future Fed rate hikes, holiday spending, and a potential recession.

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

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