Fed rate hikes can increase your monthly credit card payments: here’s how to cut costs
The Federal Reserve lowered its benchmark rate in the spring of 2020 to stimulate economic activity during the COVID-19 pandemic. As a result, interest rates remained low on a number of financial products, from mortgages to credit cards.
But the Fed has scheduled several rate hikes in 2022 to combat high inflation, which is well above the central bank’s 2% annual target. The first increase was implemented last March, pushing 30-year mortgage rates above 5% for the first time in more than a decade.
While the Fed’s economic policy had a quick and significant impact on mortgage rates, the rate hikes haven’t been as significant for credit card users – yet. Fed Chairman Jerome Powell has previously indicated that consumers should expect faster and bigger rate increases throughout the year, which means credit card rates will only continue to increase.
The latest data from the Fed shows that the average credit card interest rate has already started to rise along with the federal funds rate. In Q1 2022, the average credit card rate increased to 14.56%, up slightly from 14.51% in Q4 2021.
If you’re looking for ways to cut interest charges as the Fed raises rates this year, you might consider consolidating variable-rate credit card debt into a fixed-rate personal loan. This will lock in your interest rate for the entire repayment term. You can learn more about debt consolidation on Credible.
PROS AND CONS OF BALANCE TRANSFER CREDIT CARDS
When your credit card company can raise your rate
Your credit card issuer may increase your interest rate on new purchases if you have a variable rate tied to a certain index like the US prime rate, according to the Consumer Financial Protection Bureau (CFPB). Since the prime rate is influenced by the Fed’s benchmark rate, your credit card interest rate will likely increase at about the same rate.
“That means you’ll be paying more on your card balances,” CFPB Director Rohit Chopra said in a recent blog post.
It is important to note that your bank must give you 45 days notice before raising your interest rate. Additionally, your credit card rate may incur an APR penalty if your minimum payment is overdue more than 60 days past the due date.
Since credit card interest is compounded daily, the extra cost of borrowing can add up quickly when your rate goes up. Plus, your minimum monthly credit card payments will in turn increase.
If you’re struggling to meet your minimum monthly payment, you may want to consider credit card consolidation with a personal loan. You can visit Credible to compare personal loan rates for free without affecting your credit score.
AVERAGE HOUSEHOLD PAYS $1,000 IN INTEREST AND CREDIT CARD FEES PER YEAR
How to pay off credit card debt with a personal loan
Consolidating credit card debt into a personal loan at a lower interest rate can help you lower your monthly payment and save money over time. Plus, debt consolidation is a simple process that can be done completely online. Here are five steps to paying off credit card balances with a personal loan:
1. Check your credit score.
Personal lenders determine an applicant’s interest rate based in part on their creditworthiness and debt-to-income ratio (DTI). Borrowers with excellent credit and low credit utilization will see the best deals possible, while those with fair or poor credit may see higher rates – if they qualify.
To get a better idea of your credit history, you can request a free copy of your credit report from the three major credit bureaus (Equifax, Experian and TransUnion) at www.AnnualCreditReport.com.
HOW DO BALANCE TRANSFERS AFFECT YOUR CREDIT SCORE?
2. Estimate your loan amount.
Add up your credit card balances to determine how much you need to borrow. You can consolidate debt from one or more credit cards into one monthly payment with a personal loan. Then you can use a personal loan calculator to see your monthly payment.
3. Shop around to compare offers.
Most lenders allow you to be prequalified to see your estimated interest rate with a soft credit inquiry, which will not impact your credit score. You can compare personal loan rates from multiple lenders at once on Credible’s online loan marketplace.
6 BEST PERSONAL LOANS FOR GOOD CREDIT
4. Formally request the loan.
Once you have chosen the best loan offer for your financial situation, you will need to submit a formal application. This requires a rigorous credit check, which will have a temporary negative impact on your credit history. You will also need to show proof of identity and income, such as pay stubs and a driver’s license.
5. Clear your credit card balances to zero.
After approval, the lender will deposit your personal loan funds directly into your bank account, sometimes as soon as the next business day. You can use your loan to pay off your entire credit card debt balance at a fixed rate, so your monthly payment won’t increase with inflation.
You can browse current personal loan rates in the table below and visit Credible to learn more about credit card consolidation.
HOW TO MAXIMIZE YOUR CREDIT CARD REWARDS
Do you have a financial question, but you don’t know who to contact? Email the Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.