In addition to more expensive food and gasoline, the interest rate on your credit card balance could be going up soon.
As it concluded its January meeting, the Federal Reserve Open Market Committee made clear that it plans to increase its federal funds rate, perhaps as early as March. The Fed has kept that rate near 0% since the early days of the pandemic.
Fed Chairman Jerome Powell said raising the rate is one of the tools that policymakers will use to bring down inflation, which is currently running hotter than the Fed would like.
“This is going to be a year in which we move steadily away from the very highly accommodative monetary policy that we put in place to deal with the economic effects of the pandemic,” Powell said at a Wednesday news conference.
That message was clear for Wall Street, where stocks sold off sharply while Powell was taking questions from reporters. With higher interest rates, investors believe stocks can’t be valued at current levels.
Clear implication for consumers
For consumers with a credit card balance, the implications are also clear. While very few types of loans are linked to the Fed’s federal funds rate, the interest rates charged on credit card balances are.
That means if you pay the same amount each month on your credit card bill, more of the payment will go towards interest and less will go towards paying down the balance. The Fed did not announce a rate increase at Wednesday’s meeting, but market analysts expect a rate hike to be announced at the Fed’s meeting in March.
Unfortunately, it’s not likely to be a single rate increase. If the goal is to tamp down inflation, a series of rate hikes may be required, eventually bringing the key interest rate back to around 1% – which is still very low by historical standards.
Rates won’t go up immediately
Credit cardholders may not notice the change right away. Usually, it takes a month or two for lenders to adjust their credit card rates, which are already among the highest interest rates that consumers face.
The average interest rate on credit card debt is currently around 18%. But that’s just the average rate – people with less-than-stellar credit can pay 25% or more in interest.
With credit card rate increases a few months away, now may be a good time to aggressively pay off balances. Using a balance transfer card that charges no interest for the first few months is a good way to make progress.
ConsumerAffairs’ Credit Card Buyers Guide is a good place to start when researching the best card to use for a balance transfer.