The Federal Reserve is on a mission to cool off demand and drive down inflation. And yes, you're going to face higher interest rates on your credit cards as a result.
Fed rate hikes tend to be passed along to credit cardholders within a month or two. If the Federal Reserve makes its first move to raise short term rates at its next policy meeting in mid-March, as some expect, you could be looking at higher credit card rates as soon as April or May.
"Card issuers have some flexibility, particularly with new customers, but credit card rates typically track the federal funds rate quite closely," said Ted Rossman, senior industry analyst for CreditCards.com and Bankrate.com.
Most consumers already know that it's not cheap to borrow by pulling out plastic. Or swiping the credit card app on your smartphone.
The rate hikes ahead should give consumers one more reason to pay off their high-cost credit card debt — and put a limit on how much they're willing to borrow by tapping into a line of credit on a credit card.
The average credit card rate is 16.13%, according to data from CreditCards.com. Credit card rates vary based on your credit history with those with lower credit scores paying higher interest rates on their credit cards.
"Credit card debt is already very expensive and it will probably become even more costly in 2022," Rossman said.
Credit card margins have already been creeping up, he said. For example, he said, the current 16.13% average is 12.88 percentage points above the prime rate, which is close to a record-high spread. The prime rate today is 3.25%.
Back in 2010, the average credit card rate was 10.89 percentage points above the prime rate. The prime rate then also was 3.25%.
Most credit cards today don't offer fixed rates. They're variable rates that go up or down as short term interest rates move up or down.
"The high end of the range — what people with lower credit scores pay — averages around 24%," Rossman said.
The annual percentage rates, for example, for an AARP Travel Rewards Mastercard from Barclays range from 16.74% to 20.74% to 25.74%, based on your creditworthiness. A 0% introductory APR is being offered for 15 months on balance transfers made within 45 days of account opening. The balance transfer fee is either $5 or 5% of the amount of each transfer, whichever is greater.
The redesigned My GM Rewards Card has a 0% introductory rate for the first nine months only. After that intro rate, the annual rate on the card will range from 14.99% to 24.99%, depending on your credit score. The interest rates are variable, and could go up or down in the future based on shifts in the prime rate.
How much more will it cost to borrow on a credit card?
If some forecasts are accurate, the Fed could raise short term rates by a quarter of a percentage point as many as four times or more in 2022. That means that interest rates on credit cards could ultimately go up on average to around 17% or higher by year end.
Those with lower credit scores could be looking at rates of 25% or higher on average by year end.
It's not a huge extra cost for borrowers but it is extra money that's going out the door. And some borrowers might want to reconsider how much they're using their credit cards if they're not paying off the bill in full each month.
The minimum monthly payment would go up by $4 a month — or $48 a year — if someone sees their rate go up from 16.13% to 17.13% and has a balance of around $5,525 on their credit card.
"The real issue is that credit card rates are already very high," Rossman said.
If someone has a rate of 16.13% on average now, just making only minimum payments would keep someone in debt for 194 months — or a bit more than 16 years.
And the consumer in this example would end up paying $6,160 in interest if they had $5,525 in credit card debt at 16.13%
At 17.13%, it would take a consumer 197 months to pay down the debt by making only minimum monthly payments and the overall cost of interest goes up to $6,577 — or an extra $417 and that would amount to a nearly 7% increase in the cost of interest over many years if you're only making minimum payments.
Here are some options consumers can consider:
Are there any 0% rates left?
The 0% introductory offer: Some credit cards continue to offer a 0% introductory offer or a 0% balance transfer offer, even as the Fed is set to raise rates.
A balance transfer can help you pay down debt while the 0% rate remains in place, say for nine months, 15 months or even up to 21 months in some cases.
A long 21 month 0% offer is being made on the Wells Fargo Reflect, Citi Simplicity and Citi Diamond Preferred cards, according to CreditCards.com.
After the 0% promo, Wells Fargo Reflect charges 12.99% to 24.99%, Citi Simplicity charges 14.74% to 24.74% and the Citi Diamond Preferred charges 13.74% to 23.74% currently.
Many consumers may be confused and wrongly believe that they'd get stuck paying a higher rate on all their of their debt if they don't pay off the entire balance while the 0% rate is offered, according to a survey by LendingTree.
That's often true with deferred-interest programs, such as when you open a credit card to buy furniture or cover a medical procedure. Interest is retroactively applied to your entire original purchase amount, even if you leave just one dollar unpaid by the time the regular rates hit under a deferred-interest plan.
But consumers aren't going to be billed for interest retroactively if they do not pay off their card's entire balance during while a 0% balance transfer rate is in place. You'd only owe the higher rate on the remaining balance.
Sometimes, the 0% transfer rate only applies to balance transfers made within the first 60 days or first 120 days of opening the account. Pay very close attention to the various rules in place.
You also typically need to have good credit to qualify for the 0% limited offer, such as a FICO score of 670 or higher.
Also pay attention to any balance transfer fees. Some cards have an intro balance transfer fee of 3% or 5%. You could be paying $150 to $250 to transfer a $5,000 balance. But it could be worth it, if you make sure to pay down a good chunk of the debt during the 0% offer before higher rates hit.
You are often required to make a minimum monthly payment each month while the 0% intro rate applies. That's typically based on 1% of your balance.
"Let's say you owe $5,000 and you only make minimum payments of 1% of the balance each month," Rossman said.
"You would still owe $4,049 at the end of those 21 months. And then the interest rate could skyrocket."
To truly pay down your debt, you'd need to make far more than the minimum payment during the 0% time frame.
Another warning: If you miss a payment, it's possible with some cards that the 0% rate will no longer be available to you and you'll face much higher rates sooner than imagined.
Should I try to get a personal loan?
Look into low cost personal loans: Personal loans are available at banks, credit unions and online lenders and some offer rates as low as 2.5% to 5.99% APR.
Many consumers are turning to such loans to consolidate their credit card debt and lock in lower rates.
But unlike a credit card, you're going to have to pay off a personal loan during a set period of time so monthly payments would be higher than that for a credit card.
One offer noted that at 5.99%, you'd pay nearly $24 a month for each $1,000 borrowed for 48 months. Payments are the same each month, based on a fixed interest rate and a fixed repayment timeline.
But here's the deal, higher rates are charged to those who have weaker credit scores. Some personal loans on the market now can be 20% to nearly 36%. The current average is around 10.28%, according to Bankrate.com. And you do need to factor in the cost of fees; some have fees, some don't.
Rossman noted that origination fees are common, ranging from nothing to up to 8% of the amount being borrowed.
You'd want to try to improve your credit score before borrowing by making sure to pay bills on time and avoid borrowing too much on your credit cards, keeping outstanding balances below 30% of your total credit limit.
What if I feel like I can never get out of debt?
Talk to a non-profit financial counselor: Look at your credit card statement for information on how to contact a credit counseling service. Some statements offer a number that will give you contact information for various services.
Farmington Hills-based GreenPath Financial Wellness, a non-profit counselor, gives details on its services at www.greenpath.org. Or you can call 800-550-1961 Monday through Friday from 9 a.m. to 5 p.m. eastern. The offices are currently closed for in-person visits.
The first rate hike by the Fed is expected to be small. But borrowers need to take into account that more rate hikes are likely ahead and the costs of borrowing will be going up.
