That move lands the current Federal Reserve rate at a range of 3.0% - 3.25%. What’s more, the Fed has signaled more rate hikes that will bring the Fed Funds rate up to between 4.0% and 4.50% by the end of 2022.
The rate hikes -- current and future -- all have a big impact on consumer borrowing rates on key issues home mortgages, auto loans, and personal loans.
In particular, though, the largest immediate impact of higher Federal Reserve rates may be on credit card interest rates.
Right now, the average credit card interest rate is 21.59%, according to LendingTree’s monthly credit card interest rate tracker. That’s already the highest card rate since 2019, when the company began monitoring credit card interest rates.
The Ties That Bind
There’s a close relationship between Federal Reserve interest rates and credit card interest rates.
“Credit card rates are affected by Fed rates, so consumers can expect an increase in their bills within one-or-two billing cycles, and new credit card accounts can expect higher rates upon sign-up,” said Money Plug, LLC’s certified financial education instructor Markia Brown.
Credit card companies do have some discretion on how much they can raise card rates, but a higher cost of borrowing is going to be a fact of life going forward for credit card customers when rates rise.
“Credit cards that offer a variable rate will be affected by the Federal Reserve’s increase in the Fed Funds rate,” said Fiserv’s director of portfolio management Brian McCaul. “Almost all variable rate cards are tied to the Prime Rate (plus a margin) so when the Prime rate increases (or decreases) it will impact the variable rates.”
“With the Fed’s move this week, interest rates on variable rate cards will increase by 0.75%,” McCaul noted.
Going forward, each credit card issuer determines how quickly they implement the rate change based on their policies and procedures. “Typically it will take effect after the next statement cycle occurs,” McCaul said.
Don’t Fret, But Pay Your Card Bills on Time
Even with higher interest rates, credit cards are still a very good way to make transactions, but only if you’re a financially responsible consumer.
This means not buying more than you can afford and paying off your credit card balance on time and in full every month,” MoneyCrasher.com’s senior analyst Bill Hardekopf. “If you do that, the interest rate has no effect on you - you don't incur any type of interest charges since you're paying off the entire balance.”
Once you’ve established a pattern of paying your monthly card bills on time, you immediately start benefitting from the myriad benefits credit cards bring to the table.
“The advantages of using a credit card are significant,” Hardekopf said. “Cards offer a wonderful accounting system of where you’ve spent your money, you can earn rewards with most credit cards, you’re using the bank's money for a certain period of time, and there are stronger fraud protections on a credit card than other forms of transactions.”
Yet if you tend to carry a balance, the Federal Reserve interest rate hikes can be extremely damaging from a household budget viewpoint going forward.
“In that scenario, avoid making any future purchases on your card, since that will just add to the card’s existing balance and boost your credit card debt,” Hardekopf told TheStreet. “Just put away your card and make every effort to pay down your balance as quickly as possible.”
If you have balances on multiple cards, pay off the one with the highest interest rate first going forward for the best immediate impact on credit card costs.
“You can also make micropayments, where you make small payments throughout the month to help decrease that balance,” Hardekopf added.
If, for example, your family was planning to go out to a movie and dinner and spend $75 that night, stay home instead and order a pizza and rent a movie for $25. “Then take those $ 50 savings and go online to pay down your credit card balance by $50,” Hardekopf added. “After all, every little bit helps.”