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Credit Cards

Fed's latest rate hike means credit cardholders can expect higher bills this spring and summer, warns expert

Here's how your credit card APR will be affected by the Fed raising interest rates.

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In a move that many Americans have been anticipating over the last couple months, on Wednesday the Federal Reserve raised interest rates for the first time since December 2018.

The Fed, aiming to tamp down on historically high inflation, approved a 0.25 percentage point interest rate hike and reportedly expect to rise rates six more times this year.

Americans caught a break when the Fed lowered interest rates to near zero in an emergency cut amid coronavirus concerns two years ago, but today borrowing is about to get more expensive.

For the millions of credit cardholders, this could mean having a higher bill in the upcoming months. Here's how the Fed's rate hike affects specifically credit card APRs, plus how you can avoid being impacted too much.

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How the Fed's interest rate hike affects credit card APRs

The Fed controls what's called the federal funds rate, or the interest rate for interbank lending. The Fed may make adjustments to the federal funds rate based on the economy's current conditions. A healthy economic climate can trigger an increase in the federal funds rate (which is what we're seeing today), while an unstable economy can trigger a rate cut (which is what we saw in the beginning of the pandemic).

Individual banks and financial institutions then use this federal funds rate as a starting point to set their own prime rate, or the interest rate passed onto the most creditworthy consumers.

Typically, however, credit cardholders' interest rates are above the prime rate. "Most credit card issuers add several percentage points to the prime rate to make their cards' interest rates," says Matt Schulz, chief credit analyst at LendingTree. "That means that when a card issuer advertises that a card offers a range of APRs from 13.99% to 23.99%, what they're really offering is the prime rate, plus an additional 10.74% to 20.74%."

The latest quarter percentage point, or 25 basis points, rate hike by the Fed will likely cause a 0.25% increase in your credit card interest rate. This means that if your interest rate is 15.25%, it may increase to 15.50%, for example.

According to Schulz, it could take consumers one to two billing cycles to see this increase reflected in their credit card APRs. This means that, starting this spring and into the summer, cardholders can expect higher credit card bills if they carry a balance month to month.

Pay down credit cards as interest rates rise

Although a quarter percentage point rate hike isn't that sizable at first, it's worth noting that this seems to be the first of many more rate increases to come. Plus, credit cards already have notoriously high interest rates, so any additional increase can just make your unpaid balance balloon even more over time and make it more difficult to pay off.

As interest rates rise, your best bet is to pay down high-interest credit card debt. To do so, Schulz suggests using a balance transfer credit card. These cards offer no interest on balance transfers for a set period of time — up to 21 months. During the introductory 0% APR period, you can pay down your debt without paying costly interest charges.

For example, both the Citi® Diamond Preferred® Card and the Citi Simplicity® Card have an intro APR offer of no interest for 21 months on balance transfers from the date of your first transfer (after, a 15.24% - 25.24% variable APR on the Citi Diamond Preferred and a 16.24% - 26.24% variable APR on the Citi Simplicity). All transfers must be completed in the first four months and the balance transfer fee of $5 or 5% of the amount of the transfer, whichever is greater. Just make sure you have a plan to pay off your entire balance before the 21 months are up, otherwise you'll end up being charged interest on your remaining balance.

As credit card APRs are expected to rise, it's also worth calling your issuer to try and negotiate the same APR you had, or even a lower one if your credit score is good and you have a solid track record of paying your bills on time. And, of course, to avoid ever paying interest on credit cards altogether, we recommend paying your balances off in full every month.

Bottom line

As a result of the Fed changing the federal funds rate, the prime rate also changes and your credit card APR will fluctuate accordingly — meaning an increase in the federal funds rate and prime rate results in an increase in your card's APR.

Now is a good time to transfer your credit card debt to a balance transfer card, or call up your issuer and try to negotiate your new APR.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.