Credit card APRs to rise again as the Federal Reserve raises benchmark rate a quarter point

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As interest rates will increase for the second time this year, credit card users will pay more to carry a balance

Senior Reporter
Expert on consumer credit laws and regulations

APRs to rise again as Federal Reserve increases benchmark rates

APRs on credit cards are headed up for the second time this
year, as the Federal Reserve ratcheted up its main benchmark rate.

The Fed announced a quarter-point increase in the federal
funds rate Wednesday to keep the hot economy from boiling over.

“Job gains have been strong, on average, in recent months, and the unemployment rate has declined,” the rate-setting
Federal Open Market Committee said in its official
policy statement
after its two-day meeting.

Increases in the federal funds rate translate quickly into
higher APRs on most credit cards. That’s because cards have variable rates
linked to banks’ prime rate. And banks raise the prime in step with the federal
funds rate.

Cost of higher rates
hits credit card users

Rate increases are easy to miss on your monthly credit card
statement, but if you carry a balance from month to month, they can have a
serious impact on your finances.

  • Today’s
    increase of 0.25 percent means
    an additional $12.50 in annual interest on a
    typical $5,000 card balance.
  • If you
    pay off the balance over five years
    , the total interest costs rise by $77.
  • Considering
    this hike is the seventh
    since the Fed began tightening in 2015, people who
    carry a balance are already paying substantially more in interest.
  • Annual
    interest on a $5,000 balance
    has gone up by $87.50 as a result of the Fed
    rate increases.

Today’s move is the seventh rate increase in this economic cycle, since the Fed began easing up on the economy’s accelerator in 2015. The Fed most recently raised rates at its March meeting.

And there is at least one more rate hike on the way, and possibly two, according to Fed projections released with the rate announcement. A majority of FOMC members predict at least three hikes this year and more are leaning toward four. The Fed statement mentioned rising inflation and economic strength.

“This increase is just another reason why people need to
make 2018 the year they really focus on knocking down their credit card debt,”
said Matt Schulz, senior industry analyst at Creditcards.com. “The Fed’s almost
certainly not finished raising rates, so your debt is only going grow and get
harder to pay off.”

See related: Best low-interest cards of 2018

“This increase is just another reason why people need to
make 2018 the year they really focus on knocking down their credit card debt.”

5 ways to offset rising card APRs

Credit card rates are expected to rise after the Fed voted to raise interest rates for the sixth time since December 2015. Here are five actions credit card holders who carry a balance can, and should, take to minimize the cost:

  • Pay off, or at least pay down, your balance.
  • Create a budget and stick to it.
  • Buy time with a balance transfer card.
  • Lower your interest rate.
  • Get help to manage debt.


For further details and advice
, see our Guide to rising credit card interest rates.

Inflation figures
show economy is running hot

 

The move comes a day after new figures came out showing that
inflation is running above the Fed’s target of 2.0 percent. The Consumer
Price Index
for May, the broadest measure of price increases, was up 2.8
percent over the past year, the Bureau of Labor Statistics reported.

However, inflation isn’t so strong that the Fed will have to
speed up its rate hike schedule, economists said.

“The build in inflation pressures, at least on the retail
level, is more gradual than implied by the 2.8 percent print on headline CPI
inflation,” Regions Bank chief economist Richard Moody said in a research note.
Housing costs contributed much of the rise in May, while core inflation was a
more moderate 2.2 percent over the past year.

“The FOMC was poised to raise the funds rate at this week’s
meeting either way,” Moody said.

Rates rise as employment
reaches capacity

The job market is running near capacity as well.

The jobless
rate edged down to 3.8 percent
in May, the Labor Department said, as the
economy created 223,000 more jobs.


As the number of unemployed workers dwindles,
employers may boost wages to fill openings – and raise prices to cover the
cost.




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