The Federal Reserve’s recent interest rate hike (opens in new tab) was the fourth consecutive three-quarters of a percentage point raise on interest rates and the sixth interest rate hike overall. Currently, the federal funds rate is between 3.75% to 4.00%, and it’s bad news for those with credit card balances.
This additional increase in interest rates should be seen within the next one or two statement cycles for your credit card. The interest rate of credit cards is now the highest it’s been since 1993, reaching an average variable rate of 18.77%.
Since interest rates are expected to peak anywhere from 4.5% to 4.75% before going down, credit card APRs could easily surpass the all-time record of 19.00%. Just this year alone, rates have gone from 16.30% to 18.77%, troubling for those with credit card debt.
This rise in rates means interest on your credit card balances will be more expensive. Therefore, it’s important to pay off cards and avoid carrying these balances.
The average card balance is $5,270 and “every quarter-point increase equates to about $100 in additional interest over the life of your minimum payments,” Yahoo reports (opens in new tab). If minimum payments on a $5,270 balance are paid with an APR of 19.52%, you’ll end up paying $7,128 in interest, more than you owed in the first place.
How to handle an increase in your credit card’s APR
Perhaps the most obvious way to avoid hefty interest rates is to pay down credit card balances as soon as possible. Making more than the minimum payments each month is key to getting credit card debt paid off. Additionally, avoid putting new purchases on the card and instead focus on chipping away at debt. Making a budget and strategizing where you can save money can help you get this debt under control.
Another course of action to minimize the amount you pay in interest is to opt for a card with a 0% APR offer on balance transfers, helping you avoid interest rates for typically over a year. For example, the Citi Simplicity card (opens in new tab) offers one of the longest introductory APR offers on the market. For a whole 21 months, you can pay down balance transfers, interest free. Plus, the card has no annual fee, so you won’t have to worry about offsetting an additional cost.
You may also consider consolidating credit card debt for a loan with a lower interest rate. Typically, personal loans have lower interest rates than most credit cards.