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How Federal Rate Increases Affect Credit Cards


The federal funds rate, set by Federal Reserve, is the basis for the interest rates set by most financial institutions. While the rate directly affects the interest rate that banks loan money to each other overnight, it also indirectly impacts the interest rates for many other types of financial products. If you're carrying a credit card balance, you could be affected.

How Fed Rates and Credit Card Rates Are Related

Most credit cards have a variable interest rate - one that moves up and down - which is tied to the prime rate. The prime rate is the rate that banks charge to their best customers and moves almost in tandem with the federal funds rate. So when the federal funds rate changes, so does the prime rate and so do credit card rates. Your credit card issuer doesn’t have to notify you when it’s raising your interest rate based on an increase in the prime rate. The rate increase is already outlined in your credit card agreement.

It doesn’t take long for an increase in your variable interest rate to become effective. Once the Fed raises the federal funds rate, an increase in the prime rate follows shortly and you may see your credit card rate increase within a few days. Credit card rates will typically increase by the same amount as the federal funds rate increase.

What an Interest Rate Increase Means

Your interest rate directly affects your credit card payment and the cost of carrying a credit card balance. Most credit card issuers calculate the minimum payment as a percentage of the outstanding credit card balance plus the interest accrued on the account. Since you interest is increased, so will your monthly minimum payment.

The increased interest rate will also increase the amount you pay in finance charges when you don’t pay your credit card balance in full. If you’re only paying the minimum on your credit cards, it could take longer to pay off your credit card balance.

The good news is that since the Fed only raises interest rates by 0.25%, your minimum payment and finance charges won’t increase significantly. Over time, however, you may pay more in interest than you would at a lower interest rate. Pay attention to news related to the federal funds rate. If the Fed keeps raising interest rates, it will get increasingly expensive to carry a credit card balance.

Of course, if you pay your balance in full each month, a higher interest rate will only affect you if you take out a cash advance. You have a grace period to pay off purchases in full and avoid paying interest. Cash advances, on the other hand, don’t get this grace period.

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Comments 1

Frank on Saturday, 19 May 2018 14:27

Great article! You should also check out my general article on what else the fed rate affects!

Great article! You should also check out my general article on what else the fed rate affects!
Tuesday, 14 July 2020

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