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Beware credit-card holders, Fed rate hikes are coming

The Federal Reserve is expected to spike interest rate today by about 0.25 percentage points to 1.75%. While this is good news for people who have invested heavily in savings accounts (largely, baby boomers), for an average borrower it means more work hours per week. Borrowing expenses, be it for a loan or a mortgage, will rise following this move — as will credit card debts.

Debts on credit cards are calculated via variable interest rate, meaning they increase or decrease based on Fed actions.

In simpler terms, once the rate is increased, banks will have to pay more to borrow from the Fed, and they just transfer that financial burden to their customers. But yeah, that’s how banks work!

A credit card
Image courtesy: Petr Kratochvil, publicdomainpictures.net

Since December 2015, the Federal Reserve has increased interest rates five times to 1.5%. This has, in turn, cost credit card customers an extra $6.8 billion in interest, according to data from WalletHub.

The Federal Reserve has now hinted at three rate hikes this year, means borrowing is going to be a lot tougher. The average credit card charge, which currently stands at around 16.4%, could increase one percentage point by next year.

The Fed hikes are inevitable, given President Donald Trump recent policies to lift economic growth. The tax cuts and jobs act, as well as the proposed import tariffs on Chinese goods, have forced the Fed to increase interest rates faster.

Since experts believe credit card interest rates will increase within a couple of billing cycles since the Fed announcement.

The effect of the anticipated Fed move is expected to have varying impact in different cities. The most vulnerable cities include Beverly Hills, where over 61% of the residents have credit cards; and Miami Beach, where the credit card population is over 55%. Darlington and Detroit are among the least vulnerable cities with credit card population of 18.4% and 25% respectively.

Since experts believe credit card interest rates will increase within a couple of billing cycles since the Fed announcement, there are two things you could do to reduce your debt burden. One would be to pay off the entire credit card balance every month, or at least minimum payment due.  You could also consider shifting to a card that offers a lower rate.

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