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Credit Card Interest Rates Rising & How To Handle Credit Card Debt

Sarah Li Cain4 minute read
August 19, 2022

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After a period of historically low interest rates during the pandemic, the Federal Reserve has started to increase interest rates. With inflation remaining high, the Fed has warned of more frequent rate hikes on the horizon.

As the Fed raises rates, credit card interest rates will also rise, which will affect the budget of anyone with a credit card balance. In this article, we will explore how credit card interest rates work and how to pay down your debt when interest rates are rising.

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How Credit Card Interest Works

Credit card interest rates are typically shown as an annual percentage rate (APR). The APR represents the cost of borrowing money from the credit card issuer. You can avoid paying interest on your credit card purchases by paying off your balance in full by the due date.

But if you don’t pay off the balance in full at the end of the billing cycle, the unpaid portion of your monthly spending is added to your balance. The balance will accrue interest based on the listed APR. Since credit cards often come with notoriously high interest rates, it’s easy for a relatively small credit card balance to get out of control quickly.

How The Fed Raising Interest Rates Influences Credit Card APR

The Federal Reserve uses interest rates to impact monetary policy. As the central banking system of the U.S., the Fed has the power to raise or lower the federal funds rate, which is the rate banks use to lend money to each other. When the Fed raises interest rates, the goal is to curb inflation for Americans.

Banks use the federal funds rate as a guidepost. When the federal funds rate increases or decreases, banks and other lenders adjust their own lending rates, or the prime rate, to keep pace. The latest interest rate hike raised the benchmark by 75 percentage points. Although fixed interest rate loan products aren’t impacted by the change, cardholders with a variable interest rate will see higher interest rates.

Credit cards typically have a variable interest rate. So, credit card interest rates are rising as a result of the Fed raising interest rates. If you have a credit card balance on the books, the rising interest rates will lead to higher interest payments.

How To Pay Down Your Debt When Interest Rates Are Increasing

With credit card interest rates rising, it’s a good time to pay down the debt. The right moves now can protect your budget. Here’s a closer look at some of the top ways to get out of credit card debt.

0% APR Introductory Rates

Although a convenient way to access credit, the notoriously high interest rate attached to most credit cards can lead to mounting debts quickly. In fact, the average credit card interest rate in 2021 was 16.45%.

But those interest rates are starting to climb even higher. One way to avoid sky-high rates is to seek out a credit card with a 0% APR introductory rate when looking for new cards. The upfront low interest rate gives your budget the breathing room you need to avoid a growing credit card balance.

Before signing up for a new credit card, check out what the annual percentage rate will be after the introductory period. Also, find out if you’ll face any annual fees.

Balance Transfer

If you have an extensive amount of credit card debt, seeking out a balance transfer credit card with an introductory 0% APR period is a useful option. Depending on the credit card, you could lock in that low rate for over a year.

The lack of mounting interest charges gives you the chance to make focused headway on your outstanding credit card debt. But before you make the transfer, check out the balance transfer fee. Typically, this fee is 3% – 5% of the transfer amount. Run the numbers to see if this option makes sense for your situation.

Debt Consolidation Loan

If you have a reasonably good credit score, a debt consolidation loan offers a relatively affordable debt management strategy. With a personal loan, you can lock in a fixed interest rate and standard monthly payment for the duration of the loan term.

Since 24-month personal loans had an average interest rate of 9.38% in 2021, it’s clear you can save big on interest charges.

Beyond the interest savings, a personal loan sets you up with an effective debt pay-off plan. When you sign up for a personal loan, you’ll know exactly when the debt will be out of your life for good because the monthly payments come with a scheduled end date for a $0 balance. That’s a stark contrast to making minimum payments on your credit card balance that can stretch out the amount of time you are in debt.

As interest rates rise, locking in a fixed-rate personal loan sooner rather than later is best.

Negotiate A Lower Interest Rate

When you look at your credit card statement, it’s easy to assume that your APR is a done deal. But that’s not always true. It’s sometimes possible to negotiate a lower interest rate with your credit card issuer.

Although there are no guarantees of a lower rate, there’s nothing stopping you from giving your credit card issuer a call. When you connect, simply ask for a lower interest rate. If you have a record of making on-time payments, that will work in your favor.

It never hurts to ask! Just know that your credit issuer is not obligated to honor your request.

Keep An Eye On Your Credit Report

Responsible credit management is especially important when interest rates are rising. So, it’s important to monitor your credit report regularly.

The rising interest rates will push your credit card balance to grow more quickly. That can lead to a higher credit utilization ratio, which can negatively impact your credit score. When you check your credit report, make sure that your utilization ratio isn’t getting too high. The general guideline says a utilization ratio under 30% is healthy.

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Manage Your Debt In Spite Of High Interest Rates

If you have a credit card balance, the Fed rate hike will put more pressure on your personal finance situation. If possible, locking in a responsible debt management strategy now will pay off. It may be a good time to lock in a fixed-rate personal loan to manage your credit card balance.

If you have other questions about managing credit card debt with rising interest rates, check out our Learning Center to read more.

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Sarah Li Cain

Sarah Li Cain is a freelance personal finance, credit and real estate writer who works with Fintech startups and Fortune 500 financial services companies to educate consumers through her writing. She’s also a candidate for the Accredited Financial Counselor designation and the host of Beyond The Dollar, where she and her guests have deep and honest conversations on how money affects our well-being.