PhotoWith the economy gaining steam and the stock market ratcheting higher, it’s becoming more likely that the Federal Reserve will raise the federal funds rate in the coming months. Unfortunately, that might be bad news for consumers who are carrying large credit card balances.

That’s because credit card interest rates are directly tied to the federal funds rate. As it goes up, credit card interest rates are likely to follow it higher. CreditCards.com pegs the average credit card interest rate at 16.15%. It has gone up each time the Fed has hiked the federal funds rate in the last two years.

Another hike in December?

Boston Fed President Eric Rosengren recently predicted the Fed will need to raise interest rates in December and then three or four times next year. Those rate hikes will likely push credit card rates even higher.

John Ganotis, founder of CreditCardInsider.com, says credit cards are already one of the most expensive types of loans. No matter what the Fed does in the coming months, he urges consumers to aggressively pay off their balances.

"If you're already in a lot of credit debt and want to lighten the load, you may be able to save some money on interest with a balance transfer offer," Ganotis told ConsumerAffairs. "If you do a balance transfer, make sure you have a plan to pay off that debt, and that you don't accumulate additional debt after transferring the balance.”

Consumers should also use a balance transfer card with no balance transfer fee. That could save $150 on the transfer of a $5000 balance. The Chase Slate card, for example, has no transfer fee if you transfer a balance in the first 60 days the account is open.

Store branded credit cards

If the average credit card interest rate is going up, you can expect the rates on store-branded cards to climb even higher.

A new report from CreditCards.com found the average retail credit card interest rate rose for the third straight year to 24.99 percent. The study found one store card -- the Brandsource card -- hit 30 percent APR for the first time this year.

“Retailers are upping their rewards game in an effort to entice customers to sign up for their high interest credit offerings,” said Matt Schulz, CreditCards.com senior industry analyst. “The average retail card rate is so absurdly high that folks who will carry a balance should look elsewhere."

These rewards can include very attractive discounts on purchases made with the card, but Schulz warns paying a steep interest rate on a growing balance makes that discount less rewarding.

However, consumers should know that high interest rates are only a problem if they carry a balance. If you pay the entire bill on time each month, then you can enjoy the rewards and pay no interest at all.


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