Inflation can be seen everywhere from the gas pump to the grocery store. Supply chain issues have significantly increased the consumer price index in Q4 of 2021 which has led the Federal Reserve (Fed) to indicate it will try to drive down inflation by raising interest rates up to three times when it meets quarterly in 2022.
A wide variety of consumer loans, including credit cards, are tied to the Fed funds rate which is used to control the supply of money, which impacts inflation and other interest rates. Raising the rate makes it more expensive to borrow by lowering the supply of available money, which increases the short-term interest rates and is designed to keep inflation in check.
The Federal Reserve will hold its next policy meeting in mid-March, and many economists expect it will raise interest rates. That action means you could be facing higher credit card rates in April or May, as credit card company’s rates are usually tied to the federal funds rate, and they pass the higher interest rate to customers within a few months.
According to Investopedia, the average credit card interest rate is 19.49% as of December 31, 2021. Many credit cards are based on variable rates that rise or fall as short-term interest rates move up or down. If you have a variable rate card and the Federal Reserve increases rates you will most likely see an increase in your rate.
The average rate is 12.88 percentage points above today’s prime rate of 3.25%, which is near record-high spread levels.
How much more will it cost to borrow on a credit card?
If some economists’ predictions are correct, the Fed could raise short-term interest rates by a quarter of a percentage point multiple times this year. If this happens, interest rates on variable rate credit cards could rise throughout 2022. Individuals with lower credit scores could face interest rates as high as 25%. With anticipated rate hikes now is a good time to formulate a plan to pay off high-cost credit card debt, as well as putting the brakes on borrowing through lines of credit.
Good news, bad news
If you pay your loan balance off on time you should not notice any difference from a rate hike, and with the higher rates the prices of goods should come down, which is a welcome relief for everyone. However, if you only pay the minimum amount due or carry a balance on your credit cards then you most likely will be paying more on your debt.
What can you do if you feel like you cannot get out of debt?
The first step is to acknowledge your financial situation and make an account of all your debt. Compile it into a spreadsheet, Word document or write it down on paper. Note the sources of debt, how much and to whom it is owed, and how much you can afford to pay each month.
If you would like to speak to someone about a debt consolidation program you can contact Progressive Debt Relief for a free consultation by calling 877.590.1847 or though the online contact form.
*Progressive Debt Relief does not provide legal, financial or tax advice and the above should not be construed as such.
