How the Fed's Rate Hike Affects Your Credit Card
It’s been so long since the Federal Reserve raised interest rates, many people have forgotten that their credit card interest rate is probably tied to the prime rate. Nearly every credit card now has a variable interest rate. That means nearly every cardholder who carries a balance from one month to the next will be paying a higher interest rate on their next credit card statement. The Fed raised the rate a relatively small 0.25% yesterday, and the increase can take place right away on your credit card balance–there is no 30- or 60-day notice needed.
If you pay off your balance in full each month, the rate hike has very little effect on your credit card account.
When it comes to the 0% introductory offers, they may not be immediately affected because the interest rate increase is so small. In addition, delinquencies and defaults are still very low, so credit card issuers are in a fairly healthy financial position. If a second rate increase happens, then the introductory offers may start to get trimmed.
This is probably a good wake up call for consumers. Many have not looked at a credit card rate in years because rates have been so stable. Since we now seem to be entering a period when rates may keep going up, it is a good time to see if your credit card has the most competitive rate available or if you could lower your rate by applying for a new card.
It also is a call to consumers to do everything possible to pay off their credit card balances as quickly as possible. The cost of carrying a balance will only increase as interest rate hikes occur.
Rising interest rates can actually be considered good news for consumers in some respects. First, it means the economy is starting to recover and the Federal Reserve is confident enough in the recovery to raise the interest rates. Second, it means you may earn a little more now on fixed income investments like savings accounts.
The Fed’s move does indicate that we may be entering a time where they are likely to keep raising rates. Rates have been historically low for a very long time, and this is probably a signal that the time for extremely low rates is over. Consider refinancing large loans, such as mortgages, if you can get lower rates as future hikes may come quickly. It is possible rates could be at least 1% higher by this time next year. A 30-year mortgage of $200,000 will cost an extra $1,440 per year and an extra $42,733 over the
life of the mortgage with a 1% increase in rates. If you have an adjustable rate mortgage, consider switching to a fixed rate mortgage now.