Fed Rate Hike Will Cost Americans $2.4B in Additional Credit Card Debt Interest

via MarketWatch:


If you have credit-card debt, it just got a little more expensive.

The Federal Reserve on Wednesday once again raised its benchmark federal funds rate — having already done so earlier this year — as many economists had expected. The Federal Open Market Committee announced that it will raise the rate from 2.25% to 2.50%.

What that means for consumers: Their credit-card bill is going up, too. Consumers with credit-card debt will likely pay an additional $2.4 billion in interest payments annually as a result of the Fed’s decision, according to an analysis from the credit-card website CompareCards.com. To determine that number, analysts at the site looked how much those carrying a balance pay in interest, based on the current average annual percentage rate (APR).

Cardholders currently have roughly $1 trillion in credit-card debt collectively, according to the Federal Reserve. Based on those numbers, CompareCards concluded cardholders will collectively pay $2.4 billion more with a 25-basis point hike.

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“This latest increase is yet another reason why Americans need to make 2019 the year they focus on wiping out their credit card debt,” said Matt Schulz, chief industry analyst for CompareCards. “As rates rise, it only gets more expensive and takes more time to pay off that debt. That means big trouble for Americans who are already loaded down with debt and struggling to make it from paycheck to paycheck.”

The Fed raises and lowers interest rates in an attempt to control inflation. When the Federal Reserve raises its rates, it costs more for banks to borrow money. And they typically pass on those costs to the consumer.

When the Fed rate goes up, consumers will typically see the impact within about 60 days, or one or two billing cycles, Schulz said. And while federal law requires credit card issuers to notify consumers of a rate increase for various reasons, such as a missed payment, they do not need to do so when the increase is a result of a Fed rate hike.

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That’s because credit-card interest rates are variable and tied to the prime rate, an index a few percentage points above the federal funds rate. It is a benchmark that banks use to set home equity lines of credit and credit-card rates. As federal funds rates rise, the prime rate does, too.

People with credit-card debt may want to consider trying to refinance or consolidate it now, or transfer it to a card with a lower interest rate.

“Rising interest rates will start taking a toll on borrowers that are already stretched to the limit with tight household budgets,” said Greg McBride, chief financial analyst at the personal-finance website Bankrate. “Higher rates and higher payments will squeeze the buying power of households without a compensating increase in wages.”


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